Insurance companies yet to see fire sale of high-value life policies

Many life insurance companies are yet to see a sharp spike in the sale of high-value policies as was widely expected in the aftermath of the government’s decision to tax income from insurance policies having an aggregate premium above Rs 5 lakh in a year.

This is for policies issued on or after April 1, 2023.

Insurers expect March, which is typically the busiest month for life insurance companies, to see increased sales of such policies before the government’s proposal kicks in.

After the Budget announcement, analysts at various brokerage houses had reckoned that high-value non-par guaranteed products could see a fire sale over the next two months (February and March) to avail of tax benefit which only goes away from April 1.

“Nothing extraordinary happened in February. Perhaps it’s not yet registered with customers. It’s too early to say,” said a chief executive officer (CEO) of a private sector life insurance company.

“However, in March, we might see a pick-up,” he added.

“There is some interest from customers because we are seeing enquiries.

"But there has not been a spike in the sale of high-value policies.

"We could see some increase in March because typically it’s the busiest period for life insurers,” said Mahesh Balasubramanian, managing director (MD) and CEO, Kotak Life Insurance.

According to Rushabh Gandhi, deputy MD, IndiaFirst Life Insurance, after Union Budget 2023-24, there has been significant increase in customer inclination towards buying non-unit linked insurance plan (ULIP) products over and above Rs 5 lakh.

“As of February, our business witnessed a 20 per cent increase in the composition of its non-ULIP portfolio versus the first 10 months of the year.

"We have also observed a 15-20 per cent increase in the average ticket size concerning non-ULIP policies over Rs 5 lakh,” said Gandhi.

Meanwhile, the life insurance industry is still awaiting clarity from the finance ministry on the relaxations it has sought on the Budget announcements.

Life insurers through various fora have represented to the government that while they agreed with the government’s broad idea of taxing high networth individuals (HNIs), the premium threshold of Rs 5 lakh being used as a benchmark to classify policyholders under HNI category is something they are taking an exception to.

Hence, the industry has asked the government that the threshold be increased to Rs 10 lakh, from Rs 5 lakh.

Further, instead of taxing the proceeds from these policies under income from other sources in the year of receipt, which could result in negative returns for policyholders (adjusted for inflation), the benefits of redefined super-HNI should be taxed under long-term capital gains with indexation benefits, given the long-term nature of products.

“The government is mulling on this. We are hoping for the best,” said a private sector CEO quoted earlier.

Even so, insurers are girding up for a worst-case scenario and reworking their strategy to combat the negative impact of this proposed policy.

Most insurers will look to sell more policies by getting into the mass segment instead of focusing on high-value single-premium policies.

They are also looking to make pure protection products and unit-linked products more attractive to counter the impact.

The central government in this year’s Budget proposed to tax proceeds from high-value life insurance policies (non-ULIPs) to plug the arbitrage that HNIs are using to get tax-free returns on their high-value insurance policies through Section 10(10D) of the Income-Tax Act.

Awaiting clarity

Analysts had reckoned that high-value non-par guaranteed products could see a fire sale over the next two months

The life insurance industry is awaiting clarity on the relaxations it has sought on the Budget announcements

The industry has asked the government that the threshold be increased to Rs 10 lakh, from Rs 5 lakh

Insurers are girding up for a worst-case scenario and reworking their strategy to combat the negative impact of this proposed policy