In Budget 2025, the government clarified that returns from Unit Linked Insurance Plans (ULIPs) not exempt under Section 10(10D) will now be taxed as capital gains at a rate of 12.5 percent.
Section 10(10D) incentivises long-term savings by exempting life insurance policy proceeds from tax, provided premium conditions are met.
This new tax policy might encourage a shift in consumer preference, Sanjay Agarwal, Senior Director at CareEdge Ratings, told Moneycontrol.
Since ULIPs typically experience lower persistency because of their market risk exposure, policyholders might pivot towards other offerings, he said.
While it is true that ULIP sales have significantly driven premium growth for private insurers due to favourable market conditions, a downturn in market stability typically leads to reduced demand for ULIPs, with effects usually seen nine to twelve months later, Agarwal added.
According to sources, the budget announcement came at a time when the taxation of ULIPs with high premiums had been a point of confusion between policyholders and tax officials since 2021. Now, ULIPs will be taxed like mutual funds, with any profits being subject to capital gains tax.
In FY25, while life insurance companies have experienced a significant year-over-year Annual Premium Equivalent (APE) growth of 13.8 percent, the recent quarter (Q3 FY25) presented a setback the industry's APE declining by 2.3 percent.
The year-over-year growth came from private insurers which saw a 11 percent growth year-over-year, largely driven by increased ULIP sales from private insurers, as opposed to a significant 27.3 percent decline by the Life Insurance Company (LIC).
The downturn in LIC's performance was mainly due to a sharp fall in group insurance premiums, which account for about 33 percent of its revenue.
Vibha Padalkar, CEO of HDFC Life, during an earlier interview with Moneycontrol, had also noted that the performance of ULIPs can fluctuate due to varying economic or market conditions, which also affects persistency.
Moreover, now that deposit growth has slowed in the banking system, banks have likely been pushing traditional banking products over insurance products, Agarwal pointed out.
Last year in November, Finance Minister Nirmala Sitharaman had also said that banks should prioritise more on core banking products over unnecessary insurance bundling.
Others challenges
In October, 2024, IRDAI came out with a new norm which said that policyholders who surrender their policies will now receive a higher value than before, especially for new endowment policies. Since insurers must now pay out more when a policy is surrendered, this could lead to a decrease in their profit margins. The money they have to return to policyholders upon surrender reduces the amount they can hold onto from premiums.
The argument here is that with higher surrender values, there is a disincentive for insurance agents or companies to push unsuitable or unnecessary policies. So, if customers know they can get a significant portion of their money back upon surrender, they might be more discerning about the policies they commit to, or less likely to remain in unsuitable policies due to the financial penalty of surrender being less severe.
The number of Individual Non-Single policies sold in December 2024 was 20.1 lakhs, a 21.0 percent drop compared to the previous year, primarily due to these revised surrender value norms, a CareEdge Ratings report said.
Moreover, more than half of HDFC Life's and SBI Life's sales come from bancassurance, as pointed out by a CareEdge Ratings report, which means that private life insurers depend heavily on their banks to sell their policies, especially their parent banks.
Last month, Moneycontrol reported that IRDAI might introduce regulations to reduce the heavy reliance on bancassurance by parent banks. In response, Vibha Padalkar commented that this might not be wise, especially considering India's need for greater insurance penetration.
Growth dynamics in private insurers
When it comes to private insurers, if we ranked them by APE, SBI Life is the largest, followed by HDFC Life and ICICI Prudential.
However, in terms of APE growth over the past one year alone, ICICI Prudential leads at 27 percent, followed by HDFC Life at 20 percent, and SBI Life at 11 percent.
According to the CareEdge Ratings report, the growth rates for these companies differ significantly due to product focus and distribution strategies.
ICICI Prudential has the highest growth at 27 percent, driven by a 50 percent increase in ULIP sales, which constitute half its business, but these offer lower margins.
HDFC Life achieves 20 percent growth with a 55 percent rise in non-par savings products, attracting risk-averse customers with higher margins, while its ULIP share slightly decreased.
SBI Life, despite being the largest by APE, has shown a 11 percent growth with ULIPs making up two-thirds of its portfolio, but sees declines in other areas like group and individual protection. Its growth is hampered by slower bancassurance expansion compared to direct agency sales.
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