Review your life insurance planning post Budget

Written by Prakash Praharaj | Updated: Mar 24 2012, 08:37am hrs
The Union Budget 2012-13 has proposed that life insurance premiums, other than deferred annuity, will be entitled to deduction under Section 80C of the Income tax Act, 1961, only when they are not in excess of 10% of the capital sum assured.

The capital sum assured excludes the value of any premium agreed to be returned or any bonus to be received under the policy. The same is also applicable for availing maturity benefits under Section 10(10D). Under the existing provisions, eligible deduction is taken at a maximum 20% of the sum assured where as under the DTC, it is proposed at 5%. There is a strong underlying message of the amendment, i.e, life insurance should primarily provide protection cover.

All regular premium life insurance policies, except pension plans, issued after April 1, 2012, have to offer a minimum protection cover of 10 times the annual premium. So, when buying life insurance policies, the buyers need to ensure this if they want to avail tax benefits. Companies, of course, will initiate steps to ensure that the policies offered by them will meet the proposed norms and policyholders are not deprived of tax benefits.

In case of term plans, the protection cover is already above the stipulated norms. But in case of endowment policies, where the objective is long-term savings, along with protection, the protection cover is lower, so that the mortality charges are low and more funds are available for investment. Further at the time of product pricing, the premiums are set for multiple combinations of term and age for both men and women. It may so happen that the product will be compliant with the proposed provision of the Bill at a certain term and age, but not at other terms and age. Companies may take a call to revise the product features to make it compliant with the norms at all terms and ages. In that case, the returns to the policyholder will get reduced.

Unit-linked insurance plans are suitable for long-term investments and wealth creation. For policy holders aged 45 or below, the protection cover mandated by the regulator is already 10 times the annual premium. But for 45 years and above, the stipulated cover is a minimum of seven times. At a higher age, the need for protection is less because some dependents become independents and liabilities gets reduced over time. If protection is increased to 10 times, mortality charges will be higher and returns will get affected.

Impact of service tax. The service tax is proposed to be increased by 2%. Companies may decide to pass on the burden to the policyholders. From April 1, the service tax will increase to 12.36% for all term plans, health insurance and on the aggregated charges of Ulips.

For traditional plans, the rate of service tax will increase from 1.55% to 3.09% in the first year and 1.5% in subsequent years.

Health Insurance. Under Section 80D, preventive health checkups up to R5,000 can be claimed under the overall limit of R15,000. Further additional amount of R20,000 is allowed for senior citizens. Now the eligibility age for senior citizens has been reduced from 65 to 60 years and this will benefit them.

The writer is chief financial planner, Max Secure Financial Planners