Insurers rattled by new ULIP definition, seek tax relief

Life insurers want the government to provide differential tax treatment to long-term savings, now that the insurance regulator has made a clear distinction between unit-linked insurance products (ULIPs) and mutual funds.

ULIPs and equity-linked savings schemes (ELSS) of mutual funds are currently in the same basket when it comes to tax exemption for investments upto Rs 1 lakh. The tax treatment cannot be the same for the two products as ULIPs are long-term savings instruments and ELSS are short-term instruments.

The Insurance Regulatory and Development Authority (Irda) yesterday issued detailed guidelines on ULIPs which provided for a three-year lock-in period, five-year minimum term of the policy and norms for minimum sum assured and disclosures.

"Now that the Irda has clearly defined ULIPs, the government needs to redesign its taxation policy to differentiate between long-term and short-term savings," said Sam Ghosh, managing director, Bajaj Allianz Life Insurance Co.

Internationally, taxation drives the flow of money into various savings instruments and the same should be the case in India. Private sector insurance companies expect a sharp dip in their premium income as the guidelines have made ULIPs unattractive for short-term investors.

Also, the mandatory training of agents and intermediaries before they are authorised to sell ULIPs has made selling of the products impossible till steps are taken to fulfill this requirement, insurance officials said.

Nearly 70 per cent of the premium income of private sector insurance companies till now flowed from ULIPs. In fact, Birla Sun Life Insurance Co does not have any traditional insurance policy in its portfolio.

The other factor hampering the sale of ULIPs is the increase in cost of insurance cover resulting from the Irda guidelines.

The guidelines will help to protect policyholders' interests, but the policyholder would have to pay higher charges, said Venkatesh Mysore, Metlife India managing director. ULIPs would be priced higher to meet the increase in costs associated with safeguards and increased information disclosure.

ULIPs till now were sold with a one-year lock-in period that attracted a mid-term investor who would normally have gone to mutual funds. ULIPs, though a life insurance product, was at times hawked as an investment instrument which also offered insurance cover.

The new guidelines would help customers to understand the product better and may result in some people opting out from buying ULIPs, Mysore said.