Higher Tax
Makes Traditional Life Insurance plans
Less Appealing...!
By Mr. Pankaaj Maalde, CFP
The hike in service tax rate has increased the
cost of life insurance & will surely reduce the overall return in
traditional plans, which are a combination of insurance cover and saving
element coupled with income tax benefits.
Traditional life insurance plans are easily sold. Previously, only LIC of India was pushing these
products.
Now private insurance firms have also
aggressively launched many traditional plans in the last few years.
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| Pankaaj Maalde, CFP |
Traditional life insurance plans are neither
insurance plans in the true sense of the term as they offer a limited sum
assured, nor investment products since they are unlikely to beat inflation.
Insurance distribution is agent-driven.
Agents promote traditional plans more because
they pay about 35% commission in the first year and 5% renewal commission
thereafter till the premiums are paid.
The Insurance Regulatory Development Authority of
India (IRDAI) is not taking any steps to reduce charges in traditional plans.
Hidden charges & a higher service tax will make traditional plans investor
unfriendly.
The service tax journey started from 1% and has
now increased to 3.50% in just four (4) years.
Moreover, returns on traditional plans are most
likely to come down to below 6% per annum It is much better to take a term plan
& invest balance in PPF as PPF also gives tax benefit and maturity is also
tax free.
This combination of term and e Public Provident
Fund (PPF) will give at least 2% more
return compared to traditional plans.
The other option for investment can be conservative
Monthly Income Plan (MIP) funds as many people invest more than Rs. 1.50 lakhs
p.a. in life insurance products. Traditional plans are debt-oriented.
A substantial investment of about 85% is in
government and corporate bonds and only 15% is invested in equity. This
combination of heavy debt & defensive equity is like mutual fund’s MIPs,
which score better due to low cost. You can expect about 10% average tax-free
return from MIP plans of mutual funds.
Let us understand the returns difference with the
concrete example. Suppose a 30-year male wants to buy a traditional endowment
plan of Rs. 10 lakh sum assured for a 20-year term. The annual premium for him
will be about Rs. 50,000 assuming he is healthy and does not smoke.
The premium for him will be added with service
tax applicable. So his premium for first year will be Rs. 51,750 and Rs. 50,875
for the second year onwards till end of the term. The bonus rate for endowment
plan is around Rs. 45 per thousand. Assuming this will remain the same for the
next 20 years, the maturity value will be around Rs. 19 lakh giving return of
5.62% in a year.
If you invest Rs. 48,000 in PPF after buying term
plan of Rs. 10 lakh the maturity amount will be about Rs. 22 lakh assuming
return of about 8% per annum. If you invest the same amount in MIP funds the
corpus will be around Rs. 27.50 lakh assuming return of nealry 10% in a year.
PPF & MIP funds will give you more even in case you die within the term.
The advantage of a term plan is that it will
never lapse as the premium will be about Rs. 2,000 per year which you still be able to pay in bad days.
The service tax on life and health insurance
should be abolished so that people can buy the adequate cover to secure their
family.
About the author
This article first appeared at Financial Chronicle
Pankaaj Maalde
Certified Financial planner (CFP)
10, Uma Deep, S. L. Road, Mulund (West)
Mumbai -400 080.
Maharashtra - India.
Mobile: +91 98200 75015
Email address: pankaajmaalde@gmail.com
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