Life insurance companies expect demand for high-ticket non-linked insurance policies, with annual premium of more than Rs 5 lakh, to increase this month for pre-booking of such policies to escape the impact of taxation change proposed in the Union Budget.
The government, in the FY24 Budget, proposed to tax income from all non-ULIP products i.e. par and non-par where aggregate insurance premium paid in a year exceeds Rs 5 lakh. The proposal will come into effect from April 1, 2023.
“We are expecting the demand for non-ULIP, high-ticket policies of over Rs 5 Lakh to increase substantially in March, 2023. The green shoots are already visible,” IndiaFirst Life Insurance deputy CEO Rushabh Gandhi told FE.
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The country’s life insurance industry posted a muted 10.5% year-on-year growth in retail APE (annual premium equivalent) for February, with diverging growth trends between private insurers. The retail APE growth in February, 2023 was largely driven by ticket-size growth, with overall average ticket-size for retail regular premium policies growing by 32% year-on-year.
“This ticket size-led growth should be seen in the context of a likely pre-booking of high-ticket (over Rs 5 lakh) non-ULIP policies in February-March 2023, to escape the impact of taxation change as proposed in the FY24 Budget,” according to Emkay Global Financial Services.
Interestingly, collective new business premium for the life insurance industry witnessed a 16.81% year-on-year decline to Rs 22,847.65 crore for February, as Life Insurance Corporation of India (LIC) saw its new business premium falling by around 32% year-on-year during the period. New business premium (NBP) or the first-year premium of private sector life insurance companies in February this year witnessed a 9.95% year-on-year growth to Rs 10,968.16 crore, according to data released by the Life Insurance Council.
Overall, NBP for the industry reported a 13.53% fall in February on a month-on-month basis from Rs 26,423.65 crore for January this year. While NBP for LIC declined 22.36% during the period on a month-on-month basis, collective NBP for the private sector life insurers fell by a marginal 1.38%.
It is to be noted that the country’s life insurance industry had witnessed a month-on-month decline in collective new business premiums for February also in 2020. After that, the industry had reported increases of NBPs for February of consecutive two years, 2021 and 2022, according to Life Insurance Council data. Interestingly, the number of policies sold by the industry during February, 2023, declined both year-on-year and month-on-month.
Analysts have pointed out that it is clear from announcements in successive Budgets that the government has been disincentivising insurance purchase motivated by tax exemptions.
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“We have seen a structural shift in government stance to remove tax exemptions on insurance. The removal of tax exemption on premiums was first mooted in FY21 through the proposal of alternate simplified personal tax structure, which had no exemptions on insurance premium. Subsequent to that, tax exemptions were removed on insurance returns for ULIPs with annual ticket-size of more than Rs 250,000 at an individual level in FY22,” ICICI Securities said in its report after the Budget.
After the government proposed to tax insurance returns for non-ULIPs with annual ticket size of more than Rs 5 lakh at an individual level, death benefits remain the only tax exemption available now for high ticket-size products.
Notably, in the Budget proposal, new taxpayers are encouraged to consider the tax regime without 80C exemptions. The Budget also proposed no tax liability for income up to Rs 7 lakh after rebate in the new tax regime.
“The (insurance) industry remains resilient to Budget announcements in terms of Individual New Business APE. The private sector has grown at 18% year-on-year for the month of February and also YTD-February. While there is a marginal drop in the industry numbers in February 2023 over January 2023, the private sector continues to grow month-on-month. This is in spite of the fact that February has 10% lesser working days than January,” Gandhi said.
The insurance industry has sought a review of the Budget proposal on taxing the income from aggregate premium above Rs 5 lakh. The main demand is to increase the threshold premium for taxation for non-ULIP products from the proposed Rs 5 lakh to Rs 10 lakh.
“There will be an impact of all these measures that have currently been announced (in the Budget)…we are giving the representation to the governments (at industry levels). We don’t know about the outcome. But in case it does not work, yes it is going to impact of course,” Tarun Chugh, MD & CEO, Bajaj Allianz Life Insurance, said in an event last month.
