The life insurance policy you just took out to safeguard your future and ensure that you have peace of mind years down the line could very well become the source of your headache today. The Government of India recently hiked the service tax and your new insurance policy is now bound to become more taxing on you. The hike in service tax from 12.36% to 14% might not look big but it is like the potholes on Indian roads, they start off small and then one day grow big enough to swallow you whole.

This hike will be reflected in both term insurance (which covers only risk) and traditional insurance (which provides savings and insurance). Traditional insurance also sees a hike in the service tax, now standing at 3.50%, up from 3% for the first year and 1.75% for subsequent years, up from 1.5%. This increase is bound to reduce the overall return on investment. Traditional life insurance plans have generally been the more popular choice owing to their simplicity and agents managed to sell them like hot cakes. With this hike these insurance policies are likely to die a slow and painful death.

The new hike is effective this June and by the looks of it insurance providers are all set to pass on the buck to you, the policyholder. So what does this ‘trickle-down’ effect mean? To put it simply, the premium you pay for your life insurance just went up. With increasing costs everywhere one might think that this was bound to happen and a small increase in the premium might not really be a big factor, for you will still be getting a higher return when your policy matures, right. Well, not exactly, the alluring life insurance policy might actually be less beneficial now compared to other investment options like Fixed Deposits or Mutual Funds.

Insurance providers are unlikely to pass on this buck to the consumer in one go and it is more likely going to be a phased affair, to lighten the blow a bit. The Life Insurance sector has not seen the best of times and this increase in tax is likely to slow it down considerably. There has been a 9% drop in new premiums in recent years and renewal premiums have also seen a gradual downward trend.

If you were to adjust these policies for inflation and other growing costs, the amount at maturity would hardly be considered an investment and the tax hike could possibly make it a dead investment. Higher premiums also means you might have to cut down on other expenses to balance out payments. This is likely to have an impact on not just the middle class and upper class policyholders but also those who have enrolled themselves in specific health care schemes. With rising inflation this new hike is bound to have the biggest impact on the middle and low income bracket who already find it hard to save money.

So how does one battle this price hike? It would make more sense to invest in a combination of plans rather than sticking to just the conventional term insurance. Investing in a traditional insurance and a provident fund might just help the investment money grow. Opting for a monthly income plan could also be smart as these give better average tax free returns. Let us consider an example of a healthy male in his early 30’s who invests in a traditional endowment plan of Rs 20 lakh for a 20 year term. The annual premium is likely to be around Rs 1 lakh per annum depending on his lifestyle. He is likely to get a sum of around 29-30 lakhs at the end of the 20 year term, which is a return of just around 5% on the investment. This return is very less compared to other options including fixed deposits or mutual funds. With this new hike in service tax the return is bound to reduce more.

Indians are just warming up to the idea and benefits of insurance and this hike is likely to deter a huge number of us from utilizing the benefits of insurance. The government has tried to get more individuals into the insurance fold with their “Pradhan Mantri Suraksha Bima Yojana” for accidental death and disability and the “Pradhan Mantri Jeevan Bima Yojana” for life insurance, but the cover of just Rs 2 lakh is insufficient for the common man today.

The government could have achieved its goal of getting more Indians insured had it not hiked the service tax. It remains to be seen how the service tax on insurance is likely to go down among the population but it looks like the people are going to have taxing days ahead.

Author's Bio: 

Sanjit Agarwal is a Financial Adviser by profession with an experience of around eight years in Personal Finance. As a Financial Writer, he has penned various write-ups on Insurance, Investments, Money Management, Retirement Planning, Savings, Tax, etc.