Having largely overcome their initial fears, the insurers now feel that new policy sales won’t be impacted much by the new impost, and expect new business to even exceed last year’s level in the current fiscal.
According to industry sources, the Budget proposal has made insurers look at newer markets and deepen penetration to increase growth opportunities, and also tinker with their product mixes. A number of companies are also working with clients to split the premium for such high-value policies among PAN-card holding members of a family.
Others are reaching out to customers to explain how the post-tax returns from these policies will still be attractive in the log term.
“Up to a certain extent, high-value policies can still be distributed amongst family members, who hold PAN so that the premium remains less than Rs 5 lakh per person,” noted an industry source.
However, the efficacy of this approach remains limited, due to the prevalence of nuclear families. At the most, such a strategy could facilitate investments of up to Rs 15 lakh to Rs 20 lakh per family, without being subject to the new tax.
The Union Budget 2023-24 has proposed to tax income from all non-ULIP products, par and non-par, where aggregate insurance premium paid in a year exceeds Rs 5 lakh. The move, which came into effect from April 1 this year, had led to concerns amongst the life insurance industry that it would impact high net worth individuals, and the business from that segment. Analysts felt that HNIs, who chose insurance policies over other investment options due to the tax-saving option, could no longer have the incentive and hence increase their exposure to other safer avenues, to mitigate their risk portfolio.
For many insurance companies, such high value policies account for 4% to 5% of the number of policies issued in a year, but in terms of value, their share can be much higher at 8% to 10%.
According to Irdai data, first-year premium of life insurers dropped by 30% to Rs 12,565.3 crore in April 2023 from Rs 17,940 crore in April 2022 along with an anticipated sequential decline of 79.6% after a strong showing in March 2023.
Insurers noted that after the rush to buy policies in March, there is a typical lull in the month of April. Agents and companies are again reaching out to clients to explain the impact of the tax change to customers and clarify that it may not be as stiff as was initially thought.
“If a client starts investing at the age of 40 years to 45 years, the policy would mature by the time he or she is about 60 years. By then the client may be in the senior citizen category for income tax and the rate of tax applicable to him or her may also reduce as the income declines. Further, given that the income tax threshold has progressively increased over the years, it is likely that it would increase further in coming years,” said another industry source.
Most insurers are now confident that the tax change may not have a huge impact on sales and overall growth of the industry. “It is estimated that sales may be even higher than last fiscal given that life insurance is now a much more accepted product,” said the second source.
CareEdge had in a recent note said that the new tax regime explains the zeal in March 2023, and subdued activities for April 2023. “The sector is expected to continue its trajectory after companies tweak their policy mix to drive growth. Further, given the protection gap, supportive regulatory landscape and insurance requirements, the long-term growth of the life insurance segment remains intact,” it had further said.
As per a March 2023 report from BNP Paribas India, discussions with three life insurers had revealed that the Section 80C-driven demand is not what it used to be for the life insurance sector and the business model has evolved beyond it.
“The `5 lakh annual premium limit for tax breaks on traditional products is only relevant to a small section of potential demand and mitigations are possible (splitting the premium between spouses in the same family for example),” the firm had said in its report, adding that experience after imposition of the ULIP premium limit of Rs 2.5 lakh provides a ready case study for efficacy of such accommodations.
