The removal of service tax on premium allocation charges will increase the investible amount.
Unit-linked insurance plans (Ulips), which have faced a lot of flak from financial advisers due to their high costs, are likely to get cheaper after the Union Budget.
The finance minister on Friday excluded Ulips from service tax on all costs except fund management fees and mortality charges. The fund management fees vary from 0.8 per cent to 1 per cent depending on whether it is a bond, equity or a hybrid scheme.
The mortality rate, on the other hand, can vary from plan to plan. For instance, a 40-year-old scheme can charge Rs 2.37 per Rs 1,000. This basically means that if the sum assured is Rs 2 lakh, the mortality charge will be Rs 474 (Rs 2.37 x Rs 2 lakh). For a 50-year old, this amount will be Rs 6.08 per 1,000.
By removing the service tax of 10.3 per cent on other costs, policy-holders will especially benefit in the initial years when the premium allocation charge (PAC) is quite high. Typically, Ulips have high charges in the first three-five years. PAC can vary between 10 per cent and 80 per cent in the first year, depending on the policy. That means a saving of 1-8 per cent.
The Finance Bill, 2010-11, says that service tax will be levied on “the gross amount charged by the insurer, which shall be equal to the maximum amount fixed by the Insurance Regulatory & Development Authority (Irda) as fund management charges for Ulip or the actual amount charged for the purpose by the insurer, whichever is higher”.
Experts said this would increase the investible amount because in the absence of service tax on premium allocation and policy administration charges, the amount would go up. The rise in the investible amount could lead to an increase in returns.
“The reduction in service tax in Ulips will reduce overall costs and bring them on a same level as mutual funds,” said Kamesh Goyal, MD & CEO, Bajaj Allianz Life Insurance.
For instance, if one considers HDFC Standard Life’s Endowment Supreme plan, earlier, a 25-year-old paying a premium of Rs 20,000-25,000 (for 30-year policy) attracted a PAC of 33.09 per cent (including 10.3 per cent service tax) in the first year. In second and third years, the PAC fell to 16.54 per cent and 11.3 per cent, respectively. In addition, there was an administration cost of Rs 55.15 every month, nesides a 1.38 per cent fund management fee.
Post Budget, the cost for the same policy will come down in the following manner. In the absence of service tax, the PAC will be 30 per cent (first year), 15 per cent (second year) and 10 per cent (third year). The administration cost will be Rs 50 per month.
The savings – For someone investing Rs 20,000 per annum, the PAC will fall like this —Rs 618 (6,618-6,000) in the first year, Rs 308 (3,308-3,000) in the second year and Rs 260 (2,260-2,000) in the third year. And in all these three years, the administration cost will fall from Rs 55.15 to Rs 50 – a saving of Rs 5.15 per month, or Rs 61.80 a year. There will a tax of only 1.38 per cent on fund management fees and the mortality charge, based on the age.
Similarly, Reliance Life’s Super Invest Assure Basic will now levy a PAC of 45 per cent as against 49.63 per cent in the first year and 5 per cent each in second, third and fourth years, as against the earlier figure of 5.51 per cent. The administrative charge will be Rs 40 in comparison to Rs 44.12 till now. Though the numbers may seem small, if one were to invest Rs 679.80 (the savings from the first year Rs 618 + 61.80) for 30 years (like in the HDFC Standard Life’s Endowment Supreme), at the rate of 8.5 per cent (as in the case of a employee provident fund), the returns will be Rs 7,857.
If one had invested the first year’s savings in a good equity diversified fund such as HDFC Top 200 Equity for a 15-year period (since the scheme was launched in September 1996), the returns are Rs 20,440.
With the cut in service tax, Ulips may start looking more attractive to investors. However, for those looking for an insurance cover, term plans are still the cheapest options.
