Ulips Help Life Insurance Industry Grow

The life insurance industry has been growing at a steady pace over the last few years. A low 2.6% contribution to the GDP figure in 2006 it rose to 3.26% and 4.09% in 2006 and 2007, respectively. The biggest propeller of this growth has been the unit-linked insurance plans (Ulips) which have, according to some estimates, accounted for nearly 90% of the new business being generated by life insurers.

The finance Bill 2008-09 has brought the management of Ulips of life insurance companies under the service tax net. The mortality portion of the premium was already being taxed. The direct impact of this, however minimal, would be on the fund value of the policyholder.

The charge is on the service provided by the insurer to the policyholder. The amount charged for levy of service tax will be the difference between the premium paid and the investible amount segregated for actual investment (including the mortality). For example, on a premium of Rs100, if the mortality charged is Rs10 and the investible amount is Rs85, then the service tax is to be charged on Rs5, that is 100- 95 (10+85).

In simple words, the service tax of 12.36% on Ulips is going to be charged on the entire amount that the insurer keeps after deduction of mortality charges and the investible amount. Much of it is reflected in the front-end premium allocation charge. So, the higher the charge, the higher the impact. Nitin Chopra, CEO, Bharti AXA Life Insurance Co. Ltd, says: “By placing the allocation charges of Ulips under the service tax fold, while the entry load of other market-led instruments are not, Ulips are not being provided a level playing field.”

In mutual funds, the service tax is charged only on the asset management charge. This fee is only a part of the recurring charges that the fund house can charge based on the size of the corpus. Usually, it is 2.25% of the corpus. The asset management charge is part of this and capped at 1%.

Anil Sahgal, director of strategy and chief investment officer, Aviva Life Insurance, says: “The intent of the Budget speech was to bring equity between mutual funds and Ulips which, perhaps, is not the case according to the illustration given in the Finance Bill.”

Further, the industry feels the tax will hurt insurance penetration in India. Chopra says: “Indian customers prefer investment-cum-insurance plans. Ulips, as a category, promote the value-added benefit of market-led investment. Hence, Ulips need to be supported on the tax front to improve insurance penetration in India.”

The service tax will lower the returns for a Ulip holder. Says V. Srinivasan, chief financial officer, Bharti AXA Life: “Our analysis indicates that the internal rate of return (IRR) to customers on our products will reduce by 20-40 basis points per annum over a 15-year holding period, on account of this service tax.” This would hold true for most other insurers as well. Shikha Sharma, CEO and managing director, ICICI Prudential Life Insurance, says: “The service tax, perhaps the net of input credit on service tax available to the life insurance company, will likely be passed on to the consumer. As such, there will be no change in the expense ratio of the life insurance company.”

As various components of the premium of a Ulip are under the service tax net, the overall tax incidence for customers has gone up.

Look for plans that have a low upfront premium allocation charge. However, that does not mean that overall returns would be higher as insurers might resort to higher policy administration and fund management charges.