PremiumIn order to encourage people to buy pure term insurance, a separate deduction of up to ₹15,000-20,000 every year should be offered. This will be like the deduction offered on the premium towards a health insurance policy.
It is often pointed out that life insurance penetration in India is low. In 2020, it stood at 3.2% of the gross domestic product (GDP), slightly lower than the global average of 3.3%. Insurance penetration is defined as the ratio of the total premiums paid during a given year to the GDP of the country. The interesting thing is that from 2006 to 2010, India’s insurance penetration was 4% or higher, and it was at less than 3% between 2014 and 2019.
Further, most of the life-insurance premium paid by policyholders goes towards investment policies which have some insurance built into them. Most individuals who buy such policies do not have an adequate amount of insurance cover for their families.
Pure term insurance, where a specific amount is paid out only on the death of the policyholder, is barely sold. This can be gauged from the data that Life Insurance Corporation (LIC) of India had shared in its red herring prospectus before its initial public offering.
In 2020-21, the new business premium (NBP) for term insurance stood at ₹190 crore, a growth of 15% from 2019-20. Nonetheless, this formed just 0.33% of the total NBP for 2020-21. The numbers were slightly better in the first nine months of 2021-22, when the NBP for term insurance formed around 0.42% of the overall NBP.
Given that LIC sells a bulk of the life insurance policies sold in the country, what is true for LIC must be true for the insurance industry as a whole as well.Given this, the Indian life insurance industry really doesn’t really sell pure term insurance. Broadly, there are three reasons for the lack of popularity of term insurance.
First, most people who buy life insurance policies expect some sum of money when the policy matures. There is no payout in case a policyholder survives the term of a pure term insurance policy. In that sense, people really don’t understand the real objective of life insurance. To correct this anomaly, the insurance regulator and the life insurance companies need to run a sustained education campaign highlighting the benefits of buying pure term insurance, along the lines of the mutual fund industry’s mutual fund sahi hai campaign.
Second, the idea of buying term insurance makes many people uncomfortable given that it reminds them of their mortality. There is nothing really that can be done about this.
Third, the premium of term insurance policies tends to be significantly lower than the investment-oriented insurance policies. This essentially leads to a situation where insurance agents do not have enough incentive to push term insurance, given that they don’t make large commissions in absolute terms when they sell term insurance.
So, what can be done about this? At the end of the day, a pure term cover is a very important part of financial planning for the future. And families should be encouraged to buy it. One way of doing this is to tap into the behaviour of people. Many people simply buy life insurance religiously every year in order to save tax. Of course, what they buy are investment-oriented life insurance policies. Under Section 80-C of the Income Tax Act, the premium of up to ₹1,50,000, paid on a life insurance policy can be deducted from the taxable income.
Hence, in order to encourage people to buy pure term insurance, a separate deduction of up to ₹15,000-20,000 every year should be offered. This will be like the deduction offered on the premium towards a health insurance policy.While it will still not incentivize insurance agents to sell pure-term insurance, the idea of saving more tax might encourage individuals to buy pure term insurance policies to adequately insure their families. If the supply problem can’t be addressed, the demand problem should be addressed.
With the budget for the financial year 2023-24 due on February 1, this is an idea that the finance minister and the government might want to consider.
Vivek Kaul is the author of Bad Money.
