Buying a single premium policy will now become an expensive proposition and could turn out to be an unviable savings instrument for policyholders. The policyholder effectively gets back less than what he pays in terms of premium, as a result of the service tax. A large chunk is taxed, effectively bringing down the returns.
Products such as Life Insurance Corporation of India's Bima Nivesh and SBI Life's Sukhjeevan, which were selling like hot cakes, could now well become extinct. Insurance officials said: "The Budget has effectively killed single premium risk products, which were expected to boom in a low interest rate environment". New companies are now not likely to introduce single premium products.
Take a five-year single premium cover of SBI Life Insurance Company's Sukhjeevan. On payment of a premium of Rs 9,650 for Rs 10,000 life cover, a policyholder has to pay an additional Rs 482.50 towards the service tax. In effect, he pays Rs 10,132.50 for which, should he die in the first year, his nominee would get back the premium paid. In the second year, his family would get Rs 10,140 considering the assured annual Rs 70 bonus.
Effectively, his returns go down substantially on account of the service tax, said an insurance official. Moreover, as the tax benefit under section 88 has equally decreased in the case of those earning between Rs 1.5 to Rs 5 lakh, the effective rate of return for those in the higher income bracket, which had been pegged in excess of 10 per cent no longer holds true.
Further, insurance companies are revisiting the returns on their guaranteed products. OM Kotak Mahindra Life Insurance Company has indicated that it will shortly have to withdraw its single premium bond scheme, which offers 8.3 per cent returns. LIC as well as ICICI Prudential Life Insurance and SBI Life are expected to follow suit.
"Single premium policies are not our main bread and butter. Ideally we prefer all our businesses to flourish," said Sharma. Nevertheless, of LIC's total first premium income mopped up this fiscal well in excess of Rs 12,300 crore, Rs 4,900 crore alone has come by way of sale of its single premium policy -- Bima Nivesh. Pension plans account for another Rs 2,600 crore, while individual policies made up for the balance Rs 4,700-odd crore.
Maximum growth in demand during the current fiscal has been seen in single premium policies. These are structured on a defined investment element with assured returns. In the UK last year, leading European insurance company CGU mopped up POUNDS 200 million through its single premium plans. There is a psychological impact that will hit the buying behaviour of insurance companies.
Clearly, the five per cent service tax will be invoiced to the policyholder. But a further dampener on insurance companies is the fact that they will have to retune the information technology system to provide the calculation of this tax, not to mention the administration cost. "It will not be just five per cent additional cost to the policyholder, but also the administration cost," said an insurance official.
It is doubtful whether these measures will foster growth in demand for policyholders, he added. The younger generation had been targeted by new companies and even the incumbent LIC. With the service tax penalising policyholders, the younger generation is now likely to see risk products as items that can be postponed.
