K. VENKATASUBRAMANIAN
Article from Business Line
The budget has made insurance products of all types costlier. Expect premiums in all insurance products - unit linked insurance plans(ULIPs), traditional endowment and term policies to get more expensive.
Here we examine how much more you need to fork out for the life insurance policies that you hold or may wish to buy.
We also suggest an alternate investment plan for you to derive better returns.
Costlier ULIPs:
Life insurance companies offering ULIPs charge you expenses under many heads.
The premium allocation charge is 6.75-7.5 per cent of your premiums in the first year and around 4-5 per cent till the fifth year. After the fifth year, the charges are in the 2.5-3.5 per cent range across insurance companies. Apart from these, you will have policy administration charges of Rs 30-50 per month and fund management charges of 0.7-2 per cent. For a 35 year old, Rs 1.73-2 is charged per 1000 of life insurance cover per month.
Service tax was earlier payable only on mortality charges and fund management charge.
Now, all the above mentioned charges will be added for calculation of service tax.
To illustrate, for a Rs 1 lakh premium, in the first year, there will be Rs 6750 charged for premium allocation, Rs 360 for policy administration, Rs 700 for fund management and Rs 2076 as mortality charges.
Currently, you would have paid 10.3 percent service tax on Rs 2776(2076+700), amounting to Rs 286. Now, that amount would be Rs 1221 (12.36 percent tax on all charges together – Rs 9886).
That means paying Rs 985 more for the first year!
Expensive traditional plans:
Traditional endowment or whole-life or money-back plans, those that give you returns of 5-7 percent returns, do not give the split between various charges.
So, you would be charged a flat 3 percent on the first year premium (up from 1.5 percent currently) and 1.5 percent in the subsequent years.
If you paid Rs 155 on the first year premium, a new policy would entail an Rs 309 payout. This would bring down the already low returns offered by these products.
Term plans, those that offer just a risk cover and no return, would be costlier to the extent of the increase in service tax.
So, if you took a term policy by paying an annual premium of Rs 10000, the service tax would be Rs 1030. Starting April, that would be Rs 1236.
Easy investment strategy:
It is prohibitively expensive to terminate a ULIP product in the first few years. You need to have a 10-15 year horizon for you to derive maximum benefit in light of the expensive nature of the product. The increase in service tax makes it even more costlier.
For an investment horizon of 10-15 years, you might as well start SIPs(systematic investment plan) in high-quality diversified equity plans, which have much lower management charges, no entry load and superior returns over longer timeframes.
To protect yourself and your financial goals, take a term plan for sufficiently large value. This is both inexpensive and effective.
Endowment plans too with their poor returns may not be the ideal vehicles for long-term investment. If you extremely risk averse, you can invest periodically in PPF, where interest rates and limits have been enhanced. This would fetch you both tax benefits and better returns compared to traditional plans. The PPF can also be extended in two blocks of five years each. Again do not fail to take a term cover for protection.
Article from Business Line
