The report of the Standing Committee on Finance, released recently, has given life insurance companies a reason to rejoice. The Committee has recommended that for insurance policies to be eligible for tax exemption the sum assured should be 10 times the annual premium.
In the Direct Taxes Code, this limit was set higher, at 20 times the annual premium.
The Committee said increasing the ratio of premium paid to sum assured to 20 is too drastic a change and will have an adverse impact on the life insurance sector. Hence, it has recommended a more reasonable multiple/ratio of 10 times the annual premium, which will fulfil the desired objective of ensuring adequate protection in insurance.
Most insurance companies feel this recommendation, if accepted, would help both policyholders and insurance companies.
Mr Amitabh Chaudhry, Managing Director and CEO, HDFC Life, said it is a fair recommendation if tax rates are kept at the current level.
“Reducing the ratio of the premium to sum assured from 20 times to 10 times is very welcome,” he said.
According to Mr Kamalji Sahay, Director and CEO, Star Union Dai-ichi Life Insurance, the ratio of 20 times was too stiff. Reducing it to 10 will help insurance companies in designing suitable products. It is also customer-friendly and will allow customers more flexibility in choosing policies.
“Earlier, companies were selling policies which offered a sum assured of just five times the premium. Now they would have to increase it to 10 times, so the tenure of the policy too would have to increase to at least 10 years. This will suit both consumers and companies,” he said.
Mr P. Nandagopal, MD and CEO, India First Life Insurance, said that this reduction is in line with recommendations of the Life Insurance Council as well as guidelines of the IRDA.
It would also ensure that consumers' who have already purchased policies, where the ratio between premium and the sum assured is less than 20 times, would not suffer.
“More than the ratio between the sum assured and the premium, the focus should be more on the tenure. Essentially, tax exemption should be given for long-term policies, maybe 10 years or more,” he said.