Life insurance companies plan strategy tweak to offset tax impact

Union Budget has proposed to tax high-value policies with premium aggregating to Rs 5 lakh per year to plug arbitrage that HNIs are using to get tax-free returns on policies through Section 10(10D)

Life insurers are considering changes in business strategy to offset the possible impact of the proposed tax on high-value policies even as they wait for some relaxations from the government.

The Union Budget 2023-24 has proposed to tax high-value policies with premium aggregating to Rs 5 lakh per year to plug the arbitrage that high-net worth individuals (HNIs) are using to get tax-free returns on policies through Section 10(10D).

The industry, however, feels the classification of HNIs — aggregate premium over Rs 5 lakh per year — is a matter of concern because most who invest in the non-ULIPs are essentially looking to build a corpus for their post-retirement life. Hence, at their 40s or 50s they could end up paying Rs 5 lakh aggregate premium with not-so-high incomes. So, premium cannot define the level of wealth.

The industry, through representations to the government, is seeking relaxation in the premium threshold from Rs 5 lakh to Rs 10 lakh per year. It has also suggested that instead of taxing the proceeds from high-value policies under income from other sources, long-term capital gains tax (LTCG) be imposed on them and with indexation benefits.

Though the industry is awaiting the government’s response, most of the players are reworking their strategy to combat the negative impact of this policy.

“We are hoping for some relaxation from the government,” said Vignesh Shahane, managing director and chief executive officer of Ageas Federal Life Insurance.

Shahane, however, said the company was preparing to make some changes to the business strategy. “We are looking to make ULIPs and pure term products more competitive. There would be focus on selling more policies with lower ticket size and we would double down on the mass segment. These are only preliminary thoughts and these would evolve as more clarity comes through,” he said.

One of the leading private sector insurer— ICICI Prudential Life Insurance —  would now focus on more granular policies and increase the share of protection as well as annuities in its portfolio. It would also look to focus more on different members of the household rather than looking at only the earning member, a Macquarie Research report said, quoting the company’s top management.

HDFC Life, on the other hand, is planning to change selling processes to manage both growth and margins. The management told Macquarie Research it would look to tweak unit-linked plans (ULIPs) to improve margins. The company could also launch lower sum-assured products (less than 10x cover) as a 10x cover is the minimum required for claiming tax benefits and if they stand withdrawn, then customers will be happy buying lower sum assured products if required. They would also take a family view for selling products so that they can split it across various family members.

According to an initial assessment, ICICI Prudential Life Insurance expects the Budget decision would impact its annualised premium equivalent (APE) and value of new business (VNB) margin by 6 per cent. For HDFC Life, the impact could be 10–12 per cent APE and 5 per cent on VNB, ceteris paribus. State-owned Life Insurance Corporation has indicated that the impact on them is around 1.8 per cent of APE.

However, none of these estimates have taken into account the fact that customers would have taken from other life insurance companies.

Preparing For Worst

Budget proposes to tax high-value policies with premium aggregating to Rs 5 lakh per year

Though the industry seeks relaxations in the norms, most of the players are reworking their strategy to combat the negative impact

Ageas Federal Life Insurance is looking to make ULIPs and pure term products more competitive

ICICI Prudential Life Insurance will focus on more granular policies and increase the share of protection as well as annuities in its portfolio

HDFC Life plans to change selling processes to manage both growth and margins