Policy misuse rampant

RUN UP TO THE BUDGET 2004-05

Single premium insurance policies are expected to make a comeback. That's because the finance ministry is likely to concede to the life insurers' request to restore tax benefits for policyholders.

The government is, however, planning to put in place riders to stop the misuse of the single premium policies so that they are not used as alternatives to fixed deposit schemes, sources said.

They added that a decision in this regard had been taken earlier this year, but the announcement is expected to be made in the forthcoming Budget on July 8.

Policyholders, who paid premiums exceeding 20 per cent of the sum assured, were removed from the ambit of Section 10D and Section 88 of the Income Tax Act, with effect from April last year.

The tax benefits were only available on the death of the policyholder.

Revenue department officials were of the opinion that individuals were using the schemes as alternatives to fixed deposit schemes.

"Insurance companies like LIC, are among the largest investors in government securities and the changes could affect the markets in the medium-term," an LIC executive said.

An executive with a private insurance company said that globally, tax benefits were made available for single premium policies and there was a greater need for such sops in India since the government was trying to mobilise long-term funds to finance infrastructure projects with long gestation periods.

The state-owned Life Insurance Corporation has been the biggest loser since its single premium offerings like Bima Nivesh, Jivan Shree and Jeevan Dhara had generated tremendous interest from those without fixed income streams. A large number of exporters and traders invested in these schemes whenever they made a windfall.

According to the Insurance Regulatory and Development Authority, LIC underwrote individual single premium covers worth Rs 1,164.71 crore during 2003-04, 61.3 per cent lower than the previous fiscal.

In addition, the premium collected through group single premium was estimated at Rs 3,648 crore. The private insurers collected Rs 288 crore in premium through sale of individual single premium policies, which was 3.42 per cent lower than 2002-03.

The sources said that the impost has not generated much revenue for the government since the sale of single premium policy has gone down tremendously.

On the other hand, the premium income of companies like LIC, which controlled 94.34 per cent of the life insurance market at the end of the last financial year, has been severely affected. LIC's total premium income grew 1.93 per cent to Rs 15,977 crore during 2003-04.