Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

Tinkering with insurance

The government is yet to understand the role of insurance from the consumer's point of view

The tax sops being planned for the life insurance sector, as reported by Mint on Monday, spell confusion on the government’s part. The insurance industry pushed for them and got three things in return: a reduction in the service tax levied on the premium; keeping tax benefits in place for existing policies against future tax changes; and a likely increase in tax breaks aimed at pension products over the Rs1 lakh limit that investors get under section 80C of the Income-Tax Act. The proposal to reduce service tax on the premiums of life insurance policies demonstrates the Union finance ministry has not truly understood the role of insurance from the consumer’s point of view. It is clear that it views the situation from the perspective of long-term money gathering through the 70% market share that Life Insurance Corp. of India has.

Life insurance products in India are investment-heavy, leaving policyholders underinsured. Sold as investment plans with a crust of insurance, their sales pitch focuses on maximizing the premium rather than risk cover. The average life cover for an Indian policyholder is just Rs1.26 lakh, while the average premium is about Rs8,500. This money in a pure risk policy (term plan) would buy a 30-year-old a cover of about Rs1 crore. But the way insurance is constructed and sold in India makes it cost- and investment-heavy. If the government was serious about getting citizens better insured, it would make the mortality premium, or the premium that goes towards the pure risk cover, tax-friendly and not the investment part of the premium. But reducing the service tax on all parts of the premium points to the fact that North Block mandarins don’t really get the point of having a life cover.

Giving pension products an enhanced deduction over the above Rs1 lakh limit under section 80C is a good step forward for each of the three parts of the market that sell pension plans– insurance, the National Pension System and mutual funds. But it also represents lack of appreciation to see the investment landscape from the customer’s point of view. Corpus-building investors are confused by similar looking and sounding pension products that come under three different regulatory umbrellas. Due to differences in commissions, the ones with the highest commissions get sold more often. Instead of rationalizing pension products by moving all pension products under the Pension Fund Regulatory and Development Authority’s jurisdiction, additional tax breaks will push business towards insurance companies as they are able to pay the most commission to their agents due to the cost structure.

Should India have a unified insurance market? Tell us at views@livemint.com

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