Budget Impact On Your Insurance Policy

The Union Budget has made several amendments in taxation for insurance that will benefit policyholders, especially senior citizens. However, individuals would no longer be able to use term plans as an investment option, says Jay Sampat.

• All regular-premium life insurance policies issued after April 1, 2012, except pension plans, will have to offer a protection cover of at least 10 times the annual premium.
• Given the new guidelines, a person not looking for pure insurance should not buy a life policy at all. If investment is the objective, one can park funds in instruments like public provident fund (PPF), tax-free infra bonds and highly-rated non-convertible debentures (NCDs).
•  The reduction in age limit for senior citizens will help those between 60 and 65 years of age to claim a higher tax break now.
• As per the new budget provisions, the definition of insurance cover has changed. Accordingly, the premiums that will be returned to the policyholder and bonuses will not be taken into account while computing the sum assured for claiming deductions.

The Union Budget 2012 has turned out to be a mixed bag for the insurance sector. First, the good news. To begin with, all regular-premium life insurance policies issued after April 1, 2012, except pension plans, will have to offer a protection cover of at least 10 times the annual premium. If this condition is not adhered to, they will not be eligible for tax benefits under Section 80C and Section 10 (10D). While Section 80C allows a deduction of up to Rs 1 lakh on life insurance premiums, Section 10 (10D) exempts the maturity proceeds from taxation. Before this announcement, the mandated cover stood at five times the annual premium.

If you are purchasing a term plan, this proposal may not affect you since the sum assured in a term plan is several times of the premium. However, if you are buying a unit-linked insurance plan (ULIP) or a traditional plan, this change will make a difference to you.

The insurance industry is relieved that the insurance cover has been fixed at 10 times the premium paid instead of being hiked to 20 times, as was being contemplated. This new change has to be implemented by April 1, 2012, which could prove to be a major challenge. For the serious insurance seeker however, this is a welcome move, as it will ensure a minimum cover over a longer period.

Such a step by the government indicates that it is prodding individuals to buy term plans. This will result in tiny amounts for investment, as a larger share of the premium will go towards insurance. Given the new guidelines, a person not looking for pure insurance should not buy a life policy at all. If investment is the objective, one can park funds in instruments like public provident fund (PPF), tax-free infra bonds and highly-rated non-convertible debentures (NCDs). On the other hand, if one has a greater appetite for risk, one can invest in equity directly or through mutual funds.

A modification in Section 80D will help senior citizens get higher deductions on the health insurance premium. Section 80D allows tax relief of up to Rs 15000 on health insurance premium paid for oneself, one’s spouse and children. An individual can further claim tax deduction of Rs 15000 if he/she is paying premiums for the parents’ health policy. If the individual (or the parents) are senior citizens, this limit goes up to Rs 20000. Earlier, only individuals above 65 years of age were considered as senior citizens for this benefit, but this age limit has been lowered to 60 years in the Union Budget, 2012.

Another small step in the budget relates to the deduction of up to Rs 5000 spent on preventive medical checkups. You can undergo a preventive health check-up at a medical centre and submit the bill along with your investment proofs to your employer. Such benefits, to be allowed within the Section 80D limit, will come in handy particularly for the young, whose premiums are lower and hence not enough to claim higher tax breaks. Providing this tax exemption to individuals is a step in the right direction, as it will help in bringing a greater focus on preventive health care.

Under Section 80DDB, the tax benefit on medical treatment pertaining to individuals or dependants with disabilities is Rs 60000 if they happen to be senior citizens. For others, this limit stands at Rs 40000. The reduction in age limit for senior citizens will help those between 60 and 65 years of age claim a higher tax break now. So, if these individuals have a health insurance cover, they can claim a deduction of up to Rs 20000 for the premium paid as well as on treatment expenses to the extent of Rs 60000. The same would be applicable to those incurring these costs for handicapped dependants over the age of 60.

As part of the budget proceedings, the Finance Minister has also modified the definition of insurance cover. Under the new guidelines, the premiums that will be returned to the policyholder and bonuses will not be taken into account while computing the sum assured for claiming deductions. This amendment has been proposed to ensure that the life insurance products are not designed to circumvent the prescribed limits by varying the capital sum assured from year to year, the idea being to focus on life cover.

Increasing the sum assured-to-premium ratio to 10 times will promote long-term contracts. It will also encourage customers to go in for higher protection. On the flip side, this will make life insurance costly for older age bands if they procure a product after age 45, since mortality rates go up. Also, increasing the service tax rate by two per cent would result in increasing the cost of insurance for customers. If you are one of those who are looking to buy a new insurance policy, get a hang of the new rules before investing.