Insurance costs to rise post April 1

A policyholder will have to shell out 1.2-10.2% additional premium.

Insurance policies will become dearer from April 1. But the service tax-induced hikes will not affect LIC policyholders, or even those who have purchased a traditional plan from one of the private insurance companies.

This means a policyholder will have to shell out 1.2-10.2 per cent additional premium in the coming financial year, depending on the type of product chosen, and the composition of savings and risk elements within the cover.

The less the savings element, the higher the additional premium a policyholder will have to bear as the service tax is being loaded on the risk portion of the cover.

Following the government's decision to load a 10 per cent service tax on the risk portion of insurance premium plus the 2 per cent education cess, policyholders will have to bear the tax, which has till now been absorbed by the insurance companies.

In a meeting of the life insurance council, which has representation of all the 14 life players, it was decided that insurance companies would pass on the tax liability to policyholders with respect to unit-linked plans, pure term insurance covers and group plans.

In case of a pure term insurance plan, the tax will be levied at the rate of 10.2 per cent. On traditional plans, it was decided that individual companies would decide whether they would bear the burden and absorb the costs, or pass it onto the policyholders.

There is a divergence among private players when it comes to passing on the tax to customers in the case of traditional policies.

"We do not wish to lose out to the competition, especially when LIC continues to hold over 80 per cent of the market," said the CEO of an insurance company head-quartered in the north.

LIC is beraing the entire cost of the service tax. "We will absorb the service tax, which should amount to less than Rs 100 crore," said A K Shukla, managing director, LIC.

As it is not possible to segregate the risk and savings portion on existing policies, the corporation will absorb the tax liability. It has yet to take a final view on the road ahead when the percentage of service tax risees, he added.

Many private insurance players like HDFC Standard Life, ICICI Prudential Life, and Bajaj Allianz Life among others, have decided to absorb the cost of the service tax in the case of traditional policies.

The insurance industry usually clocks in almost 50 per cent of the total year's business in the last quarter. Their decion to pass on the tax could negatively affect their business income. At the same time, should they opt to absorb the cost, this would equally affect their profitability.

"We will not pass on the tax burden on our endowment and money-back plans, as we can offset this against the service tax we pay for various services," said Deepak Satwalekar, CEO, HDFC Standard Life.

However, should the percentage of service tax rise subsequently, HDFC Standard Life will also relook its decision, he added.

Aviva, SBI Life and Tata AIG Life said they would explicitly identify the additional premium policyholders have to pay on traditional plans.

In the case of ULIPs, group policies and term covers, the industry has decided to pass on the burden to policyholders. This is with the exception of LIC. However, the state corporation would take a relook should the percentage of tax rise further from the present.