Impact of Direct Tax Code on Life Insurance

Come April 2012,  and the Direct Tax Code (DTC) will come into effect.

Let us look at the impact that it might have on life insurance policies.

Currently, insurance premiums paid (upto Rs 1 lakh) and insurance policy proceeds are tax exempt. Once the DTC comes into effect, insurance policy proceeds will be tax exempt if and only if the policy maturity term has been reached (or on death, whichever is earlier) and provided the sum insured is 20 times or more the annual premium paid.

Tax savings is one of the major drivers of life insurance sales in India, as both premiums and policy proceeds are tax exempt. This will have a major bearing on the sales of life insurance policies as most policies (except the pure term insurance covers) have a sum insured of less than 20 times the annual premium. Another feature of the life insurance market is that single premium policies (which are mostly an investment tool) are very popular. These single premium policies have a very low degree of cover. The new DTC will make single premium investments less attractive than earlier. Single premium currently accounts for more than 50% of the total insurance market in India. 

So we expect to see increased sales of pure term products and protection intensive life insurance policies from 2012. We feel that that is the way it should be. In India, life insurance has begun to have less with insurance and more with investment. Before the regulations of Sep 2010, most of the ULIPs were inefficient, expensive investment products masquerading as life insurance products. With IRDA mentioning a lock in of minimum of 5 years on insurance policies, and DTC ensuring higher insurance multiple, chances are that we will begin to see more long term protection policies.