Not just a tax shelter
R KRISHNAMURTHY
Managing Director & CEO, SBI Life Insurance
The rationale behind the Union Budget proposal to withdraw the tax concession on single-premium life insurance policies under clause 10D is valid only partially.
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According to the government, a preferential tax treatment on returns accruing on single premium policies is not warranted when similar benefit is not available on interest income accruing on bonds or bank deposits.
It is important to dispel the impression that single-premium policies are bought solely to take advantage of tax benefit on the maturing sum, or as alternative to fixed income securities.
People from all walks of life and in different economic strata are seen to earmark lump sum amounts in insurance policies for a variety of reasons, not necessarily as a tax-planning device.
In a recent instance, a corporate firm approached SBI Life offering to deposit a lump sum amount (below Rs 50,000) in the name of each of its more than thousand employees where the benefits under the policy (sum assured) would become payable upon superannuation of the concerned employee. Given the wide age profile of the staff, the term of each policy would range from three to 25 years.
The company had proposed to give a modest lump sum as award to each worker to mark an event in its growth, but preferred to dispense with it as a long-term blocked saving to ensure against the amount being frittered away in immediate consumption.
It found the single-premium life policy as a good alternative, since the amount would be safe until the retirement age, and in the event of death of the worker while in service the benefits would safely accrue to the family.
Life insurance policies need to be encouraged as a long-term saving tool. The range of long term saving options for the risk-averse public is today very limited. Banks accept term deposits generally for up to 5 years.
There are few reputed firms issuing corporate bonds with long-term maturity. The days of single-premium policies fancied as assured high return instruments are over.
Starting from LIC, all life companies have almost withdrawn assured return long-dated policies. The Insurance Regulatory Development Authority has also tightened its regulatory oversight, seeking to go deep into the asset-liability mismatch of funds garnered under single premium policies.
The intention of the law makers would be met by simply making an amendment that to qualify for the existing tax benefit, a single premium policy should run for a term of at least seven years.
This would bring to the insurance fold genuine long-term savers who value the protection component. It is also important to recognise that several single premium policies come with riders such as critical illness cover, which is a genuine protection device.
At a time when the rural and urban penetration levels under life insurance cover begin to take off, we should avoid introducing policy uncertainties through the fiscal route.
World over, there are instances of insurance companies introducing successful project financing techniques, overseeing project implementation in a rigid time frame and in professional manner and serving as dependable institutions of public trust.
We have every reason to expect that the crop of insurers licensed by the regulator after due diligence would play this catalytic role in our country.
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