In India, life insurance products are a popular savings vehicle as retirement savings. Unlike other developed countries, India’s social security system is almost non-existent. In some States, wherever it is available, the scales of benefits are extremely modest, at best. Thus, life insurance plays a pivotal role in providing financial security.
The country’s insurance penetration has been continuously falling - from 4.4 per cent in FY10 to 4.2 per cent in FY11 to 3.4 per cent in FY12 (Source: Swiss Re). Currently, life insurance premiums are tax deductible up to a limit of Rs 1 lakh along with a basket of other financial products, a mix of short to long-term instruments. Right now, an individual gets the deduction under Section 80C, which is limited to Rs 1 lakh a year for different investments or expenses incurred during a year. This limit for investments savings is quite low.
Therefore, the individual taxpayers limit should be raised to Rs 3 lakh a year. Another critical reason that is slowly becoming a big cause of concern is increasing longevity.
With better healthcare facilities available, there is a gradual rise in the percentage of the ‘old’ in the country. But preference towards investments in pension products is lacking as no specific tax benefit is available. If a separate limit of Rs 100,000 is created under 80CCC for retirement savings, then it can strengthen people’s interest in pension products. Tax on annuities should be abolished as most annuities are taken post retiremen.
Life insurance offers a product suite – term products, ULIPs and traditional products - that caters to various life stage needs. To give the 80C/10(10D) tax benefit to the customer, insurers will need to restructure products where the sum assured is at least 10 times the premium paid. This seems to be restrictive.
As a person grows older the need for investment is higher than insurance. So a very high sum assured for an older person would mean there would be an impact on returns.
Hence, the tenure of the policy should be a minimum of 10 years for getting 80C/10(10D) tax benefits instead of premium paying term. Tax should ideally be levied on generation of income and not on deposit, as in case of banking industry.
The relevance of life insurance for Indian consumers is highlighted by various research that shows Indians are significantly under-insured and financially vulnerable.
It is proved that economic growth and insurance development are interdependent and that a world without insurance would be much less developed and much less stable
(The author is Director and Head, Products and Persistency Management, Max Life Insurance)