Term plan premiums to soar on rule change

Changes in premium-to-sum assured ratio proposed in the Budget are giving life insurers sleepless nights.

“Insurance companies will have to re-file or re-design the existing products in line with the new proposals. It is definitely a challenge for the industry to get adjusted within such a short period,” said G V Nageswara Rao, MD & CEO, IDBI Federal Life Insurance.

“Sales of life insurance products will be significantly affected due to the change in regime,” said another industry official, requesting anonymity.

The Budget proposed to increase the premium-to-sum assured ratio for availing of tax benefit under section 80C to 10 from 5 effective April 1.

Currently, the deduction is available on policies where the premium does not exceed 20% of sum assured or the cover does not exceed five times the premium paid.

Now, policyholders looking to avail of benefits under 80C will have to go for a cover which is at least 10 times the annual premium paid, or where the premium does not exceed 10% of the sum assured. For instance, to be eligible for the tax benefit, the premium paid for a cover of Rs1 lakh should not be more than Rs10,000.

“This will promote long-term insurance policies as the customers will spread the term to cope up with the change in ratio,” said P Nandagopal, MD & CEO, IndiaFirst Life Insurance.

On the flip side, however, insurers feel the move will be a big blow for people in higher age brackets. Going by them, as the age goes up, people need to shell out higher premiums due to high mortality risk. This will result in breaching the 10% limit.

Also, single premium products and other short-term premium paying products will become less lucrative as they offer less life cover, they fear.

In response to the letter sent by the Insurance Regulatory and Development Authority (Irda), insurers, through the Life Insurance Council, have sought a waiver of the cover multiple for higher age brackets during product approval.

There are apprehensions about a hike in life insurance premiums, too, following the Budget.

As per industry officials, the burden of increased service tax from 10% to 12% will be passed on to policyholders.

“Premiums of pure term plans will shoot up whereas endowment and Ulip plans will be affected marginally,” said an industry official.