Low Cover Under Bima Nivesh

Less than 1 per cent is invested towards mortality expenses under single-premium insurance scheme

Even as life insurance companies have speeded up plans to restore tax benefits on their single premium policies, they have not highlighted the fact that there is hardly any insurance cover under these policies.

Of the total premium paid by the assured under these policies, less than 1 per cent is invested towards mortality expenses compared to endowment policies, where over 60 per cent of the premium is transferred to an anticipated mortality fund.

This has not only reduced the cost of running such policies like Bima Nivesh for the companies, but paired with tax exemptions, has created a scheme, the effective returns from which is over 60 per cent less than the 15 per cent for traditional insurance products.

 

In the current fiscal, more than 38 per cent of the total new insurance business for Life Insurance Corporation of India (LIC) has come from single premium policies.

Of the total sum assured per Rs 1,000 under these policies, Rs 985 is paid by the investor himself as single premium.

So if the insured dies, the company has to pay only Rs 15 from its pocket, which too is not payable in the first year of the policy, and only the original premium is returned.

But on maturity, after say 5-10 years, the benefits include Rs 1,000 as sum assured, plus Rs 60 for every Rs 1000 assured.

The risk to the insurer is therefore just about 1.5 per cent, with the rest 98.5 per cent being borne by the insured himself. The attractiveness of these policies lies elsewhere.

They work as fixed deposits but with twin tax benefits for people with high income, to push their returns way above those a bank can muster.

Till Budget 2003 axed the provision, the effective tax benefits were over 30 per cent for single premium policies compared to returns of barely 5 per cent which accrue for investing in whole life policies.

For example, on an insurance of Rs 50,000, the tax rebate would work out to a massive Rs 9,850 in the first year of the policy itself.

However for a comparable plain-vanilla insurance cover, the annual premium payable would be only Rs 150, earning a tax rebate of Rs 30 only. In addition, the sum on maturity is tax exempt under Section 10 (10D) of the Act. But there is a loophole here.

Whereas it would take a lifetime to earn the same under conventional policies, the single premium policies offer a maturity period of 5-10 years.

While individual investment in gilts attract tax including those made by mutual funds, opting for this route gives a tax free investment option.