The life insurance industry is likely to witness a drop in sales of high-ticket non-participating products from April following tax-related Budget announcements. Leading private sector life insurers like HDFC Life Insurance, ICICI Prudential Life Insurance, SBI Life Insurance and Max Life Insurance are expected to take a hit as the government proposes to tax income from all non-ULIP products i.e. par and non-par, where aggregate insurance premium paid in a year exceeds Rs 5 lakh.
Analysts expect non-par products to be impacted the most, given the higher ticket sizes, due to the new tax proposal, effective April 1, 2023. According to them, the introduction of the new taxation is aimed at disincentivising insurance purchase motivated by tax exemptions.
“While protection segment will not be impacted (given that proceeds come on death, and even in ROP cases, there is no major income after deducting the premiums already paid), we expect non-par products to be impacted the most, given the higher ticket sizes,” JM Financial Institutional Securities said in a note on Thursday.
According to ICICI Securities, tactical near-term impact will likely be reduction in the single premium category and high sales of high-ticket non par product in remaining FY23 to avail of tax benefit which goes away from April 1, 2023.
“We have seen a structural shift in government stance to remove tax exemptions on insurance…tax exemptions were removed on insurance returns for ULIPs with annual ticket-size of more than Rs 250,000 at an individual level in FY22. And now, a similar thing has been done on insurance returns for non-ULIPs with annual ticket size more than Rs 500,000 at an individual level. As such, death benefits remain the only tax exemption available now for high ticket-size products,” ICICI Securities said in a note.
Exemptions under the Income Tax Act for non-ULIPs products had made high-ticket policies attractive for the higher tax-bracket affluent class. “… government has been incrementally promoting the new tax regime wherein there is no deduction for Section 80C i.e. insurance premiums from citizens who invest in insurance only to claim Section 80C tax deduction can be impacted,” observed JM Financial.
According to JM Financial, HDFC Life is expected to be impacted the most (non-par savings and par contributed 31% and 26% of APE in 9MFY23) with guaranteed non-par savings at 15%. For ICICI Prudential Life, non-linked savings (non par savings and par) contributed 29% of APE in 9MFY23. For SBI Life, non par savings and par contributed 22% and 5% of APE in 9MFY23. “Thus, the impact on ICICI Prudential Life and SBI Life is expected to be lower = ICICI Prudential Life has guaranteed non-par contribution of just 3%, while SBI Life generally operates in lower ticket sizes,” it added.
“This might not have been the right timing for introducing this tax in my view. We are just coming out of Covid. The insurance sector settled over Rs 60,000 crore of claims. The insurance penetration is fairly low and the insurance gap is very high. Due to the proposed taxation, our company’s new business top line might be impacted by 10-12% because of the attractiveness of the products. I believe in the long run, the impact will go down or it will normalise,” HDFC Life Insurance MD & CEO Vibha Padalkar told FE.
According to Tarun Chugh, MD & CEO, Bajaj Allianz Life Insurance, introduction of the new tax is a bit of a ‘dampener’ for the insurance industry and for increasing penetration of insurance and household financial savings in India.
Speaking on this specific tax proposal, Prashant Tripathy, CEO & MD, Max Life, said, “Max Life has a well-diversified mix across products and customer segments, and our share of business from customers with the impacted non-unit-linked policies with annual premium of above Rs 5,00,000 is approximately ~9% of individual APE for 9MFY23 and was ~6% for FY22.”
“You will recall in Budget of 2021 a similar exemption was withdrawn for ULIPs with ticket size more than Rs 2.5 lakh. After that, we did not see any material impact even on the share of high-ticket ULIPs. Further, the VNB impact will be marginally lower than sales impact as such high-ticket-size policies do operate at lower margins,” Tripathy said.