Insurance—Tax benefit at risk

Budget 2012-2013 will in all likelihood change the way you look at life insurance, particularly ULIP and other traditional plans.

It has been proposed in the Budget 2012-2013, that annual premium for life insurance policy paid/payable during any years of the term of the policy will only be allowed as a deduction if it does not exceed 10% of the capital sum assured.

Section 10(10D) of Income Tax Act states that any sum received under a life insurance policy, including sum allocated by way of bonus on such policy issued after 1.4.2003, in respect of which premiums payable during any of the years during the term of the policy exceeds 20% actual capital sum assured, would be exempt from income tax.

The proposed amendment will adversely affect ULIPs in particular.

ULIPs (Unit Linked Insurance Plan) gives the option--to the proposed life assured—to choose the sum assured as a multiple of the premium payable. Sum Assured usually ranges from 5x to 20x the premium. More often than the insurance agents advise a low multiple in order to keep a larger share of the premium to be invested in the market.

ULIPs are opposite to tradition plans since the starting point is the premium one wishes to pay and calculating the sum assured thereafter. Increasing number of investors started to opt only for ULIPS with a low sum assured. Even insurance companies designed products that carried a very low/negligible life insurance cover. The products were basically mutual funds in the garb of insurance.

All this is set to change once the budget proposals are passed in Parliament.

Insurance policies can only be bought if the premium payable during any of the years during the term of the policy does not exceed10% of the capital sum assured.

Life insurance has been invented by the society as a financial tool for creating a corpus to be utilized when financial support or protection is needed by a person. It is not a savings or investment product.  With the very first installment of premium paid to an insurance company, he policy holder ensures an umbrella of financial security which is guaranteed to the family in the event of unfortunate demise of the policy holder.

Life insurance is for ensuring peace of mind and not for pieces of dividends and interests.