What does life insurance mean to you–a tax saving instrument, forced savings, or a cushion for your financial dependents? Probably one of these. So far, Indians have not had any reason to seriously consider insurance as an investment product. But that outlook is set to change. Already, thanks to the tax treatment of insurance premiums,in-surance is now considered on a par with such instruments as ELSS (equity-linked savings schemes), provident funds, NSC and pension plans. But while the section 80C limit has upped the tax-free limit for life insurance from Rs 70,000 to Rs 1lakh, it has made life complex for insurers, who have just begun to pat themselves on the back for the success of the immensely popular unit-linked insurance schemes.
The new dispensation. So far, Section 88 provided for a tax deduction of only 15-20 per cent, depending on your gross income. This limit has now gone up to 30 per cent. Says Stuart Purdy, managing director, Aviva Life Insurance: "The benefit now is spread to even those earning more than Rs 5lakh, something that Section 88 did not offer." Is this good enough reason to buy insurance? Some experts are categorically opposed to the idea of insurance being used as a tax-saving instrument. Says NaniJaveri, chief executive officer, Birla Sun Life Insurance, "Insurance is bought on a need-based analysis and not on the basis of tax benefits they offer. The tax advantage is a side benefit".
Yes, insurance must be bought based on need, but given that most insurance companies today peg their products with other instruments, it makes sense to look at returns as well. And, thanks to the newly-introduced Section 80C, the tax treatment is the same across a range of products, which means that at some level you will have to consider insurance as one more investment product.
The industry is not happy about this state of affairs.Ana-lysts say that the new tax implications will spell the end of pension products. So far, investment of up to Rs 10,000 in pension products qualified for a deduction under Section 80CCC. This has now been clubbed with other products under Section 80C, impacting the popularity of these products. SaysN.S. Kannan, executive director, ICICI Prudential Life Insurance: "There is data to show that there is an overwhelming need for pension products, the doing away of this benefit may keep many away from pension products."
The year ahead. Since they can’t do much about the tax situation, insurers are waiting for the setting up of the pension fund regulatory authority and the passage of the Pensions Bill. "Once the modalities of the pension regulations are in place, one can expect a lot of activity in this area and products coming from insurers," says BimalBalasingham, director, Tata-AIG Life Insurance (see box: Pension Roulette).
While insurance companies have been offering pension products for some time now, the bill will enable the pension funds authority to get its act together and draw up plans for how this sector will function and what role insurers will play. "Globally, insurers work closely on pension products and it will be a role that we will play here as well. Pension products offer immense potential" saysKannan.
Insurers also hope that 2006 will see the IRDA (Insurance Regulatory and Development Authority) release the ULIP (unit-linked insurance plan) guidelines. These will change the way these plans are currently being sold. Also, insurers and customers will be able to get some clarity on the investment to sum assured ratio, as well as the new tax implications. Currently, you get Section 80C benefits on the entire amount you contribute into theULIP, up to a maximum of Rs 1 lakh. However, the ULIP guidelines are likely to change the rules of the game, with the sum assured being defined in multiples of the premium that you pay to get the full Section 80C benefit. What this means is that if you park Rs 1 lakh premium in a ULIP to benefit from Section 80C, you need a minimum of Rs 10 lakh sum assured insurance cover. Otherwise, you will gain only proportionately on the premium contribution equivalent to the sum assured you opt for.
Distribution channels. The industry is looking forward to guidelines governingbancassurance. This will enable some product customisation and value-addition on those products routed through this distribution channel. The current regulation ties a bank to a specific insurer and limits the bank’s customers’ choice. This is likely to go away since the market is mature enough today to handle multiple insurance products from the same bank. "In its current form, bancassurance is working well, but any change in the model should be looked into for the benefit that it will offer the customer," says Purdy.
The advent of insurance brokers has added yet another distribution channel for insurers. "The broker brings his expertise in suggesting the best policy (from all insurers) that will fit the client. Such a service goes a long way in providing the best product fit," says Birla Sun Life’sJaveri. The broker also helps in product development by sharing customer needs with insurers. The insurance distribution arms would also reap the benefits of synergies from a combined life and non-life product. "Bundling of life and non-life insurance products will reduce costs and offer greater value," saysBalasingham.
And what about the returns that policies such as ULIP will offer? Most insurers refuse to speculate here. SaysJaveri: "It would be difficult to hazard a guess on returns. Our investment philosophy is long-term and we endeavour to maximise returns for our policyholders at an optimal level of risk." He is not alone. Kannan recommends policyholders look at their insurance needs to chose a product with the right risk mix, and not buy insurance for the returns. But customers are keen on returns from any investment, and will look at ULIPs to make healthy profits in line with equity market returns.
Policy changes. A major issue to affect insurers and customers alike is the implementation of the EET regime (exempt on contribution, exempt on interest earned and taxed on maturity). Kannan says: "There will be opportunities todeve-lop products that best capitalise on the policy changes. But one will have to see how it fits into one’s insurance needs."
Customers can expect better service and a new product range, especially if the government ups permissible FDI (foreign direct investment) limit from the current 26 per cent. "
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