The government’s plan of providing social security cover through insurance schemes will remain a pipe dream unless it makes insurance investments attractive through tax incentives and products that will meet the needs of cross section of people.
The life insurance penetration in India has fallen to 3.3% of the gross domestic product (GDP), the same level as it was in 2005-06 when it was just 3.14%.
It has fallen from the peak of 5.2% in 2009-10. Insurance experts say high inflation is stifling savings and unattractive tax benefits also discourage investors to invest into insurance products.
The first year individual premium collections have been steeply falling as fewer people are reaching out to insurance as an investment tool.
The collections have de-grown by 8.67% in the last fiscal, much steeper than the de-growth of 2.23% in FY2013-14. The highest de-growth was in FY2011-12, a fall of 21.96%.
Abhijeet Gulanikar, chief investment and business strategy officer at SBI Life said, “Financial savings are not growing.
The equity markets have not done well and the private insurance companies have not been able to sell the traditional products, and the tax incentives are also not attractive.
But SBI first year premium collections have grown by 45 % through product innovations.”
Life Insurance Corporation (LIC) in a presentation to the parliamentary committee has suggested that favourable tax policies will go a long way in increasing the insurance acceptability.
For insurance products, maturity proceeds after excluding the premiums are taxable, while equity schemes are exempt for deduction under 80C limit for notified schemes.
Other products like the public provident fund and the national pension products are also exempt.
LIC has also sought for exemptions to be allowed on the basis of the term of the policy rather than the current practice of exemption being allowed for life insurance policies with premium not exceeding 10% of the sum assured.
The rationale for this is because in a life insurance policy, the premium amount is locked for the policy term.
LIC said policyholders of advanced age or of sub-standard health are adversely affected due to this provision.
Policyholders having no regular income but willing to pay single premium are also adversely affected, LIC said in the presentation.
Experts also say that the coverage can be increased through low-ticket size policies and incentives to these segments be given in the form of tax benefits.
Development of low cost and easy to understand policies will be crucial in filling the gaps created by the withdrawal of existing time-tested and familiar products due to regulatory changes brought out by the insurance regulator Irda.