Removal of tax exemption may reduce wallet share of life insurers in HNI segment

As per the budget announcement, income earned from all life insurance policies, except unit-linked insurance plans (ULIPs), with premiums above 5 lakh will be taxable. This is applicable for new policies issued after April 1 and not for existing ones.

According to an insurance report – ‘A Taxing Change’ released by Kotak Institutional Equities, “Removal of tax exemption on income from high-ticket traditional insurance policies will reduce the share of insurance wallets in the HNI segment. According to the management, such policies at HDFC 10-12% of Life’s topline. We expect the ratio to be similar across most large players.”

However, experts are waiting for detailed industry data on the part of traditional policies 5 lakhs.

Amit Ganatra, Partner – Tax & Regulatory Services, BDO India said, “As per the data available in the public domain, the clientele of insurance companies is generally around 8-10% HNIs. The withdrawal of the rebate is likely to have a 10-15% impact on the top line with less impact on profits as premiums on policies already taken by HNIs will continue.”

Currently, the maturity amount received from a life insurance policy is tax free when the premium is less than 10% of the sum assured. However, the government has said that the welfare purpose of insuring the lives of individuals was misused, and huge sums were siphoned off by high net worth individuals (HNIs). Therefore, to prevent misuse, if the total annual premium paid on life insurance policies exceeds 5 lakh, the income will no longer be exempted under the Act.

Aarti Raote, Partner, Deloitte India, said, “As per the Finance Act 2021, the tax exemption was limited to Unit Linked Insurance Policies (ULIPs) issued on or after February 1, 2021, where the aggregate amount of premium (in case of more than one ULIP ) does not exceed 2.5 lakhs. The government also sought to bring insurance policies at par with ULIPs. Therefore, Budget 2023 proposes that tax exemption on life insurance policies issued on or after April 1, 2023 (other than ULIPs) will be available only if the aggregate amount of premiums paid (in case of more than one policy) do not exceed 5 lakhs.”

Market experts suggest that after the end of the tax on ULIPs 2.5 lakh, the contribution of high-ticket ULIPs was reduced. Tax exemption on insurance has been a strong selling feature and differentiates insurance from the rest.

“We expect a lower HNI wallet share for insurance companies under the new regime, even as they moderate the impact. We believe that innovative product designs of insurers, which take advantage of diversified customer profiles and investment goals, have helped the industry maintain its overall growth momentum. With most of the big players offering multi-product bouquets, insurers have been agile in toggling products to address the slowdown in any specific segment. For example, the industry focused on safety from ULIPs in pursuit of profitability and later became non-competitive with safety when faced with headwinds,” according to the report.

“SBI Life, given its focus on SBI’s low ticket customers, could be an exception. Even ICICI Prudential Life has promoted its non-peer product with the agency and other (non-ICICI) banks; Hence, the ratio of high ticket policies may be slightly lower for ICICI Prudential Life. We find that bringing traditional insurance policies into the tax net is a direct negative for the sector. While the proportion of high ticket policies (above 5 lakh) is currently less, the average for non-equals may be around 1-2 lakhs. We expect ticket sizes to increase over time even as we do not expect exemption limits to increase at the same pace,” the report said.

Ganatra said, “Life insurance companies can make their traditional products more attractive by reducing the discount return. Traditional plans generally offer a fixed rate of return to HNIs over the long term. Investment in the policies will be affected, given the fixed returns on such policies as compared to other instruments, there will be no significant impact on profitability.”

In particular, income from annuity and single-premium policies is generally taxed. Income on ULIP over and above annual premium 2.5 lakh has also been taxed for the last two years.