Life insurers are staring at a 10-12% hit on revenue as Budget taxes higher premium products

The Budget has caused a lot of worry for the life insurance industry with its new tax proposal for higher-premium annuity products, a move the industry fears will cut sales by 10-12 percent. Leading private life insurer HDFC life‘s top man Vibha Padalkar told PTI it is looking at a 10-12 per cent hit on the company’s revenue with the budget proposal to tax life products at an annual premium of more than Rs 5 lakh.

She also fears that the increased tax exemption of Rs 7 lakh and the sharp reduction in the maximum allowance on the well-to-do to 39 per cent from 42.74 per cent earlier may push them to spend more and save less.

This could have many cascading implications for the macro sector through a spike in already high inflation, apart from the life insurance sector which has been struggling to sell since the Covid pandemic as people failed to invest in long term savings. And since the opening up of economic activities, many are on a “revenge spending mode” and are not investing in financial products even now.

Given the overall rise in incomes, the government should have either ignored the new taxation on insurance products or taxed products with a premium of Rs 10 lakh or more. At this level, it will certainly hit the industry hard, she added.

The industry anticipated a proposal to offer a composite license to the insurance industry that would allow life insurers to lease the health insurance policies, which they did until 2015. In addition, players in the insurance sector also expected some positive developments in annuity products.

Tarun Chughmanager of Bajaj Alliance Lifesaid the tax proposal for non-Ulip or higher-value traditional life insurance “puts a bit of a damper on the insurance industry and on the increasing penetration of insurance and household financial savings.”

“As a market, we still have quite low insurance penetration and there is a need for measures and incentives to encourage that in the coming years. Also, household financial savings are declining and insurance is a critical part of that. Household financial savings as a percentage of GDP has fallen from 8.1 percent in FY20 to 6.5 percent in FY23, he said, warning that ending incentives for insurance plans should to some extent put further pressure on households’ financial savings.

Vighnesh Shahane, CEO of Ageas federal life insurance, said the finance minister has announced that from April income from life insurance, excluding Ulips, with a total premium amount of Rs 5 lakh per annum or more, which was previously tax-free, will now be taxable. But if the insured dies prematurely, the death benefit remains tax-free, she said.

The move is similar to the proposal introduced a few years ago that imposed tax on the term amount of Ulips if the annual aggregate premium exceeds Rs 2.5 lakh, he said.

The proposal is likely to negatively impact sales of non-comparable products that have seen strong growth in recent years, especially during the pandemic. As the limit of Rs 5 lakh applies to all life policies from all insurers, this may discourage individuals from buying additional policies if they have exhausted their limit with their primary insurer, he explained.

Supriya Rathia full-time director Anand Rathi Insurance Brokersbelieved that the budget has “brought bad news for life insurance companies” by limiting income tax exemptions on insurance policy proceeds.