The new face of ulip

The recent changes in the Ulip structure and the new Direct Taxes Code will change the way this market-linked policy benefits the customer.

G. Murlidhar        Print Edition: November 2010

Unit-linked insurance plans (Ulips) have long been the flagship product of private life insurers. They combine insurance with equity, with the latter being managed professionally. Of the Rs 2.61 trillion paid as premium in 2009-10, Ulips accounted for Rs 1.1 trillion. For private players, they accounted for about 70 per cent of the premium received in 2009-10.

However, two recent developments, namely the new guidelines pertaining to Ulips and DTC, are poised to alter the life insurance landscape with a definite impact on all stakeholders.

A cap on charges has already enhanced the appeal of Ulips. Under the new dispensation, the allocation of a higher portion of premium towards investment and an increase of the lock-in period from three years to five years will reap better returns. A cap on the penalty for surrendering prematurely will also ensure greater liquidity. Of course, Ulips are designed to maximise benefit over the long term. Companies can also be expected to check mis-selling, in addition to a free-look period of 15 days.

The new guidelines have forced insurers to go back to the drawing board and design new products. However, margins may be under pressure given the limited manoeuvring space. To offset margin strain, insurers can be expected to streamline existing sales and distribution structures and improve the productivity of distribution channels. To ensure this, insurers will frame attractive propositions for customers through simpler, more transparent products and by improving the quality of customer outreach. Insurers will also strive to achieve a better balance between traditional plans and Ulips.

Impact of DTC

Life insurance, with assets under management (AUM) exceeding over Rs 13,00,000 crore, is an extremely important element of the country's financial savings phalanx. Any change in the tax regime will definitely have a cascading impact on the sector.

The positive aspect in the current draft is that life insurance business will continue to be under the EEE regime. However, the Bill proposes to tax maturity proceeds in the policyholder's hands, except on death, where the annual premium is less than 5 per cent of the sum assured or on policies where the dividend distribution tax has been paid.

Under DTC, it is proposed that the Ulips investing over 65 per cent of their funds in equities be brought under the EET regime. A dividend distribution tax at the rate of 5 per cent is proposed to be levied on the insurance company on the amount of income distributed or paid to the policyholders of equity-oriented schemes.

Under the Bill, life insurance products and medical insurance will qualify for tax exemption on contribution only up to a limit of Rs 50,000. Currently, investments in life insurance are eligible for deduction with a ceiling of Rs 1 lakh under Section 80C. Higher tax liability would not only make the product less attractive for customers, but also dent the government's efforts in increasing insurance penetration in this hugely under-insured country.

The method of taxation of insurance companies will also undergo a change. It is proposed to tax profits in the shareholder's account at the normal rate while the surplus in the policyholder's account will not be taxed. Among other issues, clarity is still lacking on whether insurers are liable to pay the Minimum Alternate Tax (MAT), which is proposed to be 20 per cent of book profits. For life insurers struggling to break even, these measures could put an additional burden.

COO, Kotak Mahindra Old Mutual Life Insurance

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