How GST will Influence On Your Insurance Premium: PolicyBazaar
How does GST Influence your Insurance Premium?
“Change is only constant,” they say. Switch in one thing that finishes up impacting the other. The three percent increase in GST is going to influence the insurance premium adversely. This article will be your guide regarding the increase in GST and its impacts on your insurance premium.
What is GST?
Goods and Services Tax, popularly known as GST, is a reform for our economy’s indirect tax plan. On eight th August 2016, GST Bill (which was long pending) was passed in Lok Sabha.
It was possible after a very long journey flooded with challenges, confrontations, and what not. At last, the GST bill has entered the phase of implementation, which will come into effect from July 1, 2017. GST would make switches in the tax structure inbetween the center and the state.
GST is a VAT, i.e. Value Added Tax that will eradicate the cascade effect/ dual taxation from the price of goods and services down the value chain. It would surely affect the incidence, structure, and calculation of the indirect taxes, which will lead to a comprehensive refurbishment of the current tax system in India.
The latest GST is expected to freeze at eighteen percent under the GST update. This is a bad news for all the policyholders, as this hike will influence adversely on the insurance sector, typically in terms of insurance premiums. Life insurance reach in India has diminished from Four.6 percent in the year two thousand nine to Two.6 percent in the year 2016. It reflects a no growth at all in the last a few years. The hike in the GST from fifteen percent to eighteen percent would increase the premium of purchasing a fresh as well as renewing an existing insurance policy.
The Premium Determining Factor
Basically, the premium determining factor of an insurance plan is subject to the insurance plan type you want to purchase. Based on that, we have two major categories of insurance policies – Life Insurance and General Insurance.
Life Insurance
A contract inbetween and individual and an insurer, a life insurance policy provides an assured sum of money to a designated nominee upon the death of the policyholder, which is in exchange for a premium.
Life insurance policies are sub-divided into four categories, i.e. Term plans, Pension plans, ULIPs, and Endowment plans. The service tax levied on these different insurance instruments is also different. A Term plan offers death benefit and is defined as a risk-free plan. The nominee gets the sum assured if the insured person dies during the policy term. The policyholder doesn’t get any maturity benefit in a basic term plan. There are some term plans that suggest the comeback of premium (TROP) benefit. The premium element of a term plan mainly includes the risk component in order to provide an insured person with a risk cover as long as the policy is active.
ULIPs and endowment plans provide coverage benefit and death maturity whatever example occurs very first. These plans compute investment and risk in the premium element and it makes these plans expensive in the comparison with a term plan.
The Influence on your Life Insurance Premium
A policyholder pays service tax only on the risk factor of the premium element, whereas the investment component of the insurance plans usually isn’t included in the service tax umbrella. After the GST is implemented, insurance plans, including life, motor, and health would become more expensive, as taxes would be hiked.
Term Plans
Earlier, fifteen percent service tax was levied on the premium of term plans. After the updated is implemented, the tax would be hiked by three percent and it will be eighteen percent. The individuals buying insurance plans for the very first time or renewing their existing insurance policies would have to pay eighteen percent GST.
It means that that for the payment of every one hundred rupees (towards the premium), a service tax of Rs. Fifteen was levied, which now it is going to be Rs. Eighteen as per the updated tax plan. To be precise, the premium will be enlargened by three percent.
Endowment Plans
Endowment plans are considered as one of the traditional insurance saving plans. Previously, these plans used to attract a service tax of Three.75 percent on the insurance premium while buying an insurance plan. Now, it would be enlargened to Four.Five percent as per the updated tax regime. Now, the policyholders are supposed to pay 1.88 percent service tax on the premium payment of their endowment plan(s) if they are renewing it for the 2nd time.
General Insurance
A General Insurance policy also refers to a contract inbetween and insurer and an individual, which provides an assured sum of money as compensation for loss caused by a natural or manmade script. The policy could be issued for healthcare, home, travel, automobile etc.
Health Plans
As of now, the health insurance policies (standalone as well as a family health plan)charge fifteen percent as the service tax on the premium. After the updated GST is implemented, the medical insurance plans would be costlier such as mediclaim policy for senior citizens. It would attract an increase of three percent in its tax regime, making it eighteen percent that will be charged on the premium from one st July 2017.
Travel Insurance
Those who are looking forward to traveling abroad anytime soon will also have to pay an extra tax of 3% as the fresh GST will be in effect from July 1. The customer will now have to pay 18% GST instead of 15% service tax earlier in effect. So, if you don’t want to pay more money than buy or renew travel insurance before 1st July 2017.
Automobile Insurance
Automobile insurance premium includes fifteen percent as the service tax. It will be hiked to eighteen percent when the tax rate is frozen up to this particular percentage. If you are die heart fan / paramour of your car & two wheeler then it’s best time to renew your policy with auto insurance companies so that you can save your money & plan to travel somewhere with your family.
What would be the ideal way out for the insurance buyers?
It is of utmost importance for a person to safeguard his/her life. This becomes even more significant in case a person is the foot bread winner in his family. Life insurance policies, particularly the term plans, are the life insurance plans in the true sense. These policies provide the coverage to you and compensates financially so that when you are not there, you can still look after the financial needs of your family members.
Thanks to the rise in the insurance premiums, a storm would be triggered and there would be a cut mouth competition inbetween the insurance providers to suggest best of the best insurance plans to their potential clients. This would be beneficial for them as far as their financial future is worried.
It is recommended to draw a comparison, shop around, and then purchase an insurance plan that suits your insurance requirement, structure, objectives, liabilities, and budget of you and your family.
The Relationship inbetween the GST Rule and Life Insurance Business
The insurance policies’ premium represents two components- savings and risk coverage. The service tax is levied specified only on the premium component.
According to the GST rules, the value of service on which the GST is levied regarding the life insurance sector shall be accordingly.
- The gross premium would be diminished by the amount allocated for or savings or investment on policyholders’ behalf.
- When it comes to the single premium annual policies, ten percent of the single premium would be charged from the policyholder.
- In other cases, twenty five percent of the premium for the very first year and 12.Five percent of the premium in the upcoming years will be charged. For example, if an endowment plan’s premium is Rs. 100, then the eighteen percent GST would be levied on the twenty five percent of premium (which would be Rs. 25) the GST would be Rs. Four.50.
- In case the total premium paid by the policyholder is towards the life insurance’s risk cover, only the eighteen percent GST would be levied on the total premium.
Because of the enlargened GST percentage that awaits the implementation. The overall influence of the GST would be the enlargened expenditure (premium and the enlargened GST), when it comes to term insurance and endowment plans.
The policyholders stand a chance to be benefited if the insurance providers get a green signal on the input tax credit benefit. Unluckily, as of yet, it is still unclear since the center/state GST structure is very sophisticated. It might create confusions and conformity for the insurance buyers and increase the administrative expenses for the insurance providers. If the insurance buyers remain confused about the GST update, then irrespective of the increase or decrease in the prices, the solvency of the market along with the financial strength will be adversely affected.
The general insurance sector will be identically impacted. The overall outgo for health, car, and various non-life plans would be enhanced by three percent.
Post GST implementation, the existing and fresh insurance buyers would have to bear the updated prices. For example, the current insurance premium of a term plan is Rs. Ten,000, (without the fifteen percent service tax) the updated GST will increase the premium comprising taxes by Rs. 300. It means from Rs. 11,500, it will be switched to Rs. 11,800.
When you compare insurance premiums, especially for the term plans, ensure that you look out for the premiums including or excluding GST by the various insurance providers. There should be no switches in the selection process, as the GST influence is the same for all the insurance providers. Go after a decent selection process in order to get the right insurance plan that offers you maximum coverage and fulfills your insurance expectations. This table will help you to get a better understanding of how the updated GST impacts the various insurance products and to which extent.
GST Rates: Before and After
Fresh Insurance Rates After GST
