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  • : Life Insurance: Been there, done that

    Life Insurance: Been there, done that

    Every year, there are expectations attached to the Union Budget. So, whether it is the common man or the investor, everyone has a wish list of his own. Now, as the budget draws nearer and expectations peak, we present our view on what is likely to be in store for the life insurance segment.

    What happened last year
    In last year's budget (2006-07), pension sector reforms, a much-anticipated event, was given the cold shoulder. Historically, tax benefits dictate decisions pertaining to taking life insurance for most investors, and pension plans have been no different. In fact, Rs 10,000 was a defining amount of sorts for pension plans. The reason being, that was the premium amount eligible for deduction under Section 80CCC of the Income Tax Act. The norm was to ignore one's retirement needs and instead buy pension plans only for the purpose of tax benefits. Most investors opt for a pension plan wherein the premium payments would amount to Rs 10,000 per annum and in the process completely overlook what pension plans are meant for i.e. to provide for retirement planning.

    However, the scenario changed in last year's budget, when the overall limit available for deduction under section 80CCC was enhanced. This meant that investors could contribute upto Rs 100,000 per annum for premiums paid towards pension plans. With this move, Section 80C (which is inclusive of Section 80CCC) offered greater flexibility to the investor. However, the fact remains that even now while taking pension, investors consider the revised ceiling of Rs 100,000, and not their own retirement needs.

    Investors were given the opportunity to invest across avenues in line with their needs without worrying about the tax benefits.

    What is likely to happen
    We don't expect the insurance segment to experience any significant upheaval in Union Budget 2007-08; in fact "status-quo" is likely to be this year's mantra.

    The only surprise could come in the form of a migration towards the EET (exempt-exempt-tax) regime of taxation. The idea was first mooted by the Finance Minister in Union Budget 2005-06.

    The EEE (exempt-exempt-exempt) regime of taxation is applicable for insurance products like endowment plans and ULIPs at present. Under this regime, an individual is eligible for tax sops based on the premium paid; similarly, the returns and maturity proceeds are also exempt from tax. But, under the proposed EET structure, the maturity proceeds would be chargeable to tax.

    Another area that is screaming for attention is reforms in the pension sector. Private asset management companies and insurers must be permitted to launch pension products so that individuals have more options at their disposal. At present, there is the Employees Provident Fund (EPF), which is under considerable pressure to meet the assured rate of 8.5%. This rate has dropped considerably over the years, in effect burning a hole in the investor's retirement kitty. A more prudent option is to allow private pension players to launch products that are market-linked and give the investor an option to make a choice.

    In terms of taxation, we believe that the forthcoming Union Budget will largely maintain a status quo on the insurance segment's existing structure. EET could be the surprise package. In terms of pension reforms, we believe there could be some resistance due to political compulsions.

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