Insurance industry plans to sell more term products under new tax structure

Analysts believe the new tax structure is expected to augur well for protection products | File photo
Insurance has historically been a “push product” and despite the best efforts of the regulator and the various life insurance companies, it has failed to see pull from customers. One of the biggest incentives for buying insurance has been the tax exemption under section 80C of the Income Tax Act. In the Union Budget 2020, the Finance Minister introduced an alternative lower taxation regime wherein a taxpayer can choose a lower tax rate but will have to forgo most of the deductions they enjoy under the existing tax regime.  

This has sparked a debate in the life insurance industry. One side believes that removal of exemptions will not have a detrimental impact on the insurance business in general as the customer has evolved over the years and understands that life insurance is mainly meant for protection and not as a tax-saving option.

The other side puts forth the argument that incentives in the form of tax exemptions have worked in driving up the penetration levels and the removal of it will have an impact on consumers. This is because the attractiveness of a life insurance policy will somewhat be diluted and the policy holders will have to be educated to make them aware of the importance of protection.

In this scenario, industry experts say some life insurance companies may have to change their business models to include more protection products (such as term insurance) in their portfolio. Many insurers have been consciously making this move and are increasing the share of protection products in their offerings because it makes their margins attractive. However, till date, the share of savings products outweighs the share of protection products in most of the large life insurance companies. 

R M Vishakha, managing director and chief executive officer, Indiafirst Life Insurance said at the Business Standard Insurance Roundtable 2020 that the company will intensify both its product offerings and sales effort. 

"Protection products are fairly cheap with a high risk-reward ratio and it is one of the simplest financial products in the market with a motive to protect lives. There won’t be much impact given the Budget announcement because agents currently don’t pitch for tax savings products," said Santosh Aggarwal, chief business officer, However, he added that savings product will see an impact. “We are asking customers to buy more term products because there will be a price hike post April because of reinsurance pressure,” he said.  

Insurance is also taken keeping in mind the tax savings and not the adequacy of protection it offers, said Adhil Shetty, CEO, BankBazaar. “If these are separated from taxation, chances are that people would pay more attention to the merits and demerits of the investment or insurance product,” he added.

In the past couple of years, life insurers, mainly private players, have been pushing protection products to improve margins as these term plans enjoy a higher margin. For instance, some listed players – ICICI Prudential Life Insurance and Max Financial Services (holding company of Max Life) – reported over 500 basis points year-on-year expansion in protection mix or share of protection products in the overall business during April-December 2019.

“There will be an impact but it won’t be significant because the industry as a whole has been continuously focusing on increasing the share of protection products as term products cater to the core needs of the consumer. And, this will continue to be the focus of the industry irrespective of removal of exemptions,” said Subhrajit Mukhopadhyay, chief actuary, Edelweiss Tokio Life Insurance.

Analysts believe the new tax structure is expected to augur well for protection products. Avinash Singh, analyst at SBICAP Securities said, “The government’s decision to remove tax exemptions would help outgrow protection segment vis-à-vis savings.” However, the mindset of people in terms of pricing and returns on savings could have some an impact on business of protection products. The jury is out on how the insurance companies tackle this issue as life insurers are expected to hike prices for term products by 10-30 per cent starting April 2020. Although, the new selling strategy by insurers could help change buying behaviour of customers.

Additionally, some supportive macros should help grow protection segment without much impact. According to Macquarie Capital Securities, many life insurers don’t see demand being hurt by higher pricing as the need to take protection remains high, the market is still largely under-insured and term insurance premia are still much lower in India compared to most other countries.  

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