Ulip returns set to get better

02-Mar-2010

Service tax waiver proposed in budget could add 40-50 bps

A small change in the way service tax is levied on some life insurance products is expected to ensure bigger returns on investments for policyholders. The finance bill, the expanded version of the budget presented by finance minister Pranab Mukherjee last week, proposes to waive service tax levy on the charges under unit-linked insurance plans (Ulips) barring only the fund management charge (FMC), which is levied for investing the customer's money.

Among the other charges levied in Ulips are premium allocation charge, policy administration charge and mortality charge, which is for the insurance component of Ulips. Service tax of 10.3% (including cess) on all these charges was introduced a couple of years ago. "Since the Insurance Regulatory and Development Authority has clearly stipulated that not more than 135 basis points (100 basis points, or bps, make a percentage point) can be charged as FMC, the budget lays down that either the limit of 135 bps or the amount actually charged, whichever is higher, would be chargeable to service tax. This relieves the rest of the components such as allocation charges, which are akin to exempted levies like entry and exit load from service tax," V Srinivasan, CFO, Bharti Axa Life said.

This, in turn, could add 40-50 bps (0.4%-0.5%) to the annual return for the consumer, Srinivasan added. "We are quite pleased with the proposal. We welcome the removal of service tax on all charges under unit linked insurance products except on FMC. This will benefit the policyholders," said T R Ramachandran, chief executive officer and managing director of Aviva India Life Insurance Co. "Service tax used to be levied on all the initial charges, such as administration and fund management, and removal of the same will benefit customers a lot. Returns will be better than the earlier years when the service tax was levied," Raunak Roongta, a Mumbai-based financial planner said.

"It has brought level playing field on the issue of service tax on FMC in Ulip products," said Srinivasan. According to estimates, as much as 64% of the new policies sold by insurers are Ulips, which are products combining investment and insurance. The schemes invest money collected from policyholders in a combination of stocks, debt instruments and infrastructure, as desired by the policyholder. But the investments are made from the premium after deducting certain charges. The removal of service tax on all charges except FMC is beneficial because of the sheer quantum of premium that is deducted by way of premium allocation charge.

"Typically, premium allocation charge is very high, in the range of 30-35% in the first year and 15-10% in the second and third policy year," said Suresh Sadagopan, who runs a financial advisory called Ladder7. In some insurance product categories, up to 100% of first year premium is deducted as premium allocation charges and the same is then returned with additional benefits if the customer stays for more than 10 years. But going by insurance advisors, most customers prefer to opt out in the fifth policy year. "In Ulips, the service tax component used to be adjusted against the premium. So, if the service tax is reduced, either more units may be allocated to the policyholder or less number of units would be cancelled, depending on what method the insurance company uses," said Sadagopan.

Source : www.insuremagic.com