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News & Views

Wednesday, Mar 21, 2012

Budget 2012 & impact on insurance: Not all policies will get you tax break, now

   [Source : The Economic Times]
[Source: The Economic Times]

At the first glance, there was no significant announcement on the insurance sector in the Budget. However, there are some amendments tucked away in the voluminous Budget documents that could have far-reaching implications on the way you treat insurance.

To begin with, all regular-premium life insurance policies issued after April 1, except pension plans, will have to offer a protection cover of at least 10 times the annual premium. Otherwise, they will not be eligible for tax benefits under section 80C and 10 (10D).

While 80C allows a deduction on life insurance premium up to Rs 1 lakh, Section 10 (10D) exempts maturity proceeds from tax. Until now, the mandated cover was five times the annual premium.

Both unit-linked insurance plans (Ulips) and endowment plans will be affected due to this change. However, most term plans will fulfill the new requirement. "This is a welcome move as it will ensure a minimum life cover to the policyholders.

The new requirement will ensure that they have some protection over a longer period of time," says Kamalji Sahay, CEO, Star Union Dai-ichi Life. The other tinkering include change in definition of sum assured, lowering the age of senior citizens to claim tax breaks on health insurance premium, extra Rs 5,000 on preventive health care and so on.

Change In Plans

Clearly, the government is nudging individuals to buy pure life or protection policies (term plans, in other words) than the more popular insurance-cum-investment plans such as Ulips and endowment.

Since a bigger chunk of the premium will go towards mortality charges due to the mandatory higher life cover, the devotees of Ulips and endowment plans would be left with relatively small amount for investment. "A person not looking for a pure protection cover need not buy a life policy at all.

Instead, if their objective is wealth-creation, they can direct their funds to instruments like public provident fund ( PPF), tax-free infra bonds and highly-rated non-convertible debentures (NCDs)," advises Suresh Sadagopan, certified financial planner, Ladder7 Financial Advisories.

"In terms of equity, depending on their risk appetite, they can invest either directly in stocks or through mutual funds. Based on their risk-taking ability they can choose from large-, mid- and small-cap funds."

For solely your protection requirements, you need not look beyond term policies - the cheapest form of life insurance.

Bonuses Will Not Count As Cover

The finance minister has also amended the definition of sum assured (insurance cover, in simple words). The premiums that will be returned to the policyholder and bonuses will not be taken into account while computing the sum assured for claiming deductions.

'This amendment has been proposed to ensure that the life insurance products are not designed to circumvent the prescribed limits by varying the capital sum assured from year to year,' states the Budget fine print. Again, the message is :

Focus on life cover, and not on the investment component.

Prevention Could Be The Cure

A small, yet significant, measure in the Budget relates to deduction for spending up to Rs 5,000 on preventive medical checkups. These could include blood tests for diabetes, cardio-vascular tests and so on.

To be allowed within the 80D limit, it will come in handy for individuals, particularly the young, whose premiums are lower and hence not enough to claim higher tax breaks. "Providing this tax exemption to individuals is a step in the right direction... it will help in bringing a greater focus on preventive health care.

Most progressive health insurance companies have already started focusing on this space," says Bhargav Dasgupta, CEO, ICICI Lombard. "You can undergo a preventive health check-up at a diagnostic centre and submit the bill along with your investment declaration to your employer," says Vaibhav Sankla, director, H&R Block India.

'Younger' Senior Citizens

Another minor modification in section 80D will help more elderly individuals claim higher deductions on health insurance premium. Section 80D allows tax relief of up to Rs 15,000 on health insurance premium paid for self, spouse and children.

One can further claim tax deduction of Rs 15,000 if he/she is paying premiums for parents' health policy. If the individual (or parents) are senior citizens, this limit goes up to Rs 20,000. Earlier, only individuals above 65 years were considered as senior citizens for this benefit. The Budget has lowered the age to 60 years.

Deductions For Differently-Abled Senior Citizens

Under section 80DDB, the tax benefit on medical treatment pertaining to individuals or dependants with disabilities is Rs 60,000 if they happen to be senior citizens.

For others, this limit stands at Rs 40,000. The reduction in age limit for senior citizens will help those between 60 and 65 years of age claim the higher tax break now.

So, if these individuals have a health insurance cover they can claim deduction up to Rs 20,000 for premium paid, as well as on the treatment expenses to the extent of Rs 60,000. The same would be applicable to those incurring these costs for handicapped dependants over the age of 60.

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