With premiums set to rise after GST, should you buy insurance before July 1?
Currently, a tax of 15 percent is imposed on an average insurance premium which includes Swachh Bharat Cess and Krishi Kalyan Cess. It will increase from July 1.
For anyone willing to buy an insurance policy soon, a relevant question would be whether it is beneficial to buy it before July 1.
On the basis of type of product, premium paying term and type of policy (whether an insurance policy is a life one or a non-life one), assessing the exact rise in the premium may become difficult while evaluating any of the insurance products. It is because there are different tax mechanisms involved while calculating the premium of different policies.
Currently, a tax of 15 percent is imposed on an average insurance premium which includes Swachh Bharat Cess and Krishi Kalyan Cess.
From July 1 onwards, the rate hike will get immediately passed on to customers. The new rate is 18 percent, which is uniform across the financial services sector ensuring that all insurance premiums will get a hike of an additional 3 percent from next month.
"In an insurance policy, the service tax is payable on the risk element of the premium and not on the investment you make," said Atrey Bhardwaj, Category Head – General Insurance, Bankbazaar.com. "General insurance policies, such as health, car, as well as term life insurance that provides life cover, will become marginally more expensive with the increase in the service tax rate. This is applicable for policy renewals as well."
Bhardwaj said that considering that the overall cost of insuring life and assets is slated to go up with the implementation of GST, buying a long-term plan or term insurance before GST would be a smart move. "This is something that insurance companies understand as well. We can look forward to a more competitive insurance market and, consequently, the number of insurance products with even more benefits to consumers,” he said.
Here are two different examples where your premium amount could rise significantly while buying a policy after the GST will come into effect.
In general, if you are paying a premium on a yearly basis then the rise in price will vary from Rs 200 to Rs 400 which is going to be over and above to what the premium you are paying currently. For an instance, on every insurance premium of Rs 10,000 paid on yearly basis, you will be taxed for Rs 1500 at 15 percent while after July 1 you will be taxed for Rs 1800 at 18 percent on the same amount. This shows that on every Rs 10,000 of premium you will now have to pay an extra amount of Rs 300 and so on.However, the difference in this amount will get increased if are you paying the whole premium in a lump sum to get an insurance cover for yourself. In such case, buying a policy before the GST gets into effect will be more beneficial.
For example, if you are willing to buy a term cover in coming few months and want to pay premium in one go then it is better to buy it within this month only, otherwise from next month you will end up paying higher premium amount as 3 percent of additional tax will cost you more on paying premium in one go.
Take the example of a young married couple who are willing to buy a health insurance cover of Rs 5 lakh and they also have one kid (below 21 years of age). Considering the age of the eldest member who is going to be insured is of 30 years, he lives in a metro city and his birthday falls on July 1. Also, the individual is not getting any cover from his employer. In such case, if he is going to buy a health insurance policy within this month from a good insurance company, it will cost him around Rs 7500 (inclusive of taxes).
If that individual thinks of buying that health insurance in July, then in such case, he will not only have to pay an increased premium but he will also have to pay the additional tax on the increased premium amount because of the age factor. Hence, within a day, his premium may go up to Rs 8500 (inclusive of new tax rate).However, one should also know that these rates differ from company to company. Therefore before buying any insurance product, you should consult your financial adviser.