Insurance policies will cost more from January 1, 2014

Deepak Yohannan myinsuranceclub.com

Inflation took the wind out of most Indians in 2013, causing a widespread tightening of purse strings. Even if 2014 carries the hope of some respite, the year opens to further bad news on the cost front: insurance policies are becoming more expensive from 1 January 2014.

Why This Increase in Insurance Costs? The rise in costs is taking place because the central government is extending the service tax net to include insurance premiums. The government had announced its intention to do so in the last Budget. This means that even the premiums that you are paying on life insurance policies will increase, thereby placing a further burden on your finances. News reports indicate that private insurers have already begun the process of collecting service tax from clients. The newly levied service tax comes into force on 1 January 2014, and will affect existing and new insurance products.

Will Costs Increase Equally Across the Board?No. The rate of service tax levied will differ from product to product. Traditional products that are not investment-oriented will be taxed at lower rates compared to investment-focused policies. According to a report of The Hindu Business Line, unit-linked insurance policies and term plans will be taxed at 12.36 percent, and traditional savings-oriented products at 3.09 percent.

What Does This Mean for the Policyholder?Due to the change in the service tax regulations, policyholders will now be required to pay higher premiums for the same policies. Policy buyers must now take into account taxation costs as well when shopping for or purchasing a new policy. It also means that traditional, no-frills policies will become more attractive compared to unit-linked plans because the former are subjected to considerably lower taxation rates.

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Deepak Yohannan

CEO|MyInsuranceClub.com

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Is Service Tax on Insurance a Bad Idea?Many experts are of the opinion that insurance should not be taxed in India. This is because insurance is an instrument that provides financial protection against risk. Moreover, in a country like India, investors frequently invest only to avail of tax benefits. Moreover, rather than consider insurance for its original risk-protection purposes, they look at it from an investment point of view. Since the returns are low, many people steer clear of insurance and invest their money in high-growth tools like mutual funds instead.In a country like India, where insurance penetration is low, the introduction of service tax in the realm of insurance may not represent the best step forward. What makes it worse is that the economic downturn has reduced customers’ desire for purchasing insurance.

What Is the IRDA’s Stand on This?News reports late last month mentioned that the Insurance Regulatory and Development Authority (IRDA) was looking to persuade the government to waive the tax on insurance. It appears, however, that the service tax levy is here to stay.

But, There Is Good News as Well…While the service tax on insurance premiums will make policies more expensive in the coming days, insurance buyers still have reason to smile. A slew of new customer-friendly regulations come into effect from 1 January 2014—such as a higher surrender value for ULIP holders and an increase in the minimum entry age of health plans to 65 years. Moreover, the customer is likely to be spoilt for choice as insurance companies prepare 500 new products for launch in 2014.

The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal.