With the rate of GST on services increasing from 15% to 18%, insurance premiums have become costlier. Let us find out how GST will impact insurance premium. Will the 3% higher tax really make a difference to your insurance costs? What will be the GST impact on insurance premium?
A brief primer on life insurance
A life insurance policy is a contract between an individual (the insured) and an insurer, a life insurance company that underwrites the risk. Life insurance policy provides an assured sum of money to a designated nominee upon the death of the policyholder in exchange for a premium. Life insurance policies are sub-divided into 2 broad categories. The service tax levied on these different insurance instruments is also different. Let us look at these key categories one-by-one.
Term plan offers pure death benefit and nothing else. 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. The premium 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.
Then there are growth or money-back plans like ULIPs and endowment plans which provide risk coverage benefit and death maturity whatever instance occurs first. These plans have an investment and risk component in the premium and it makes these plans relatively expensive.
How is the impact of GST on insurance policy premium computed?
A policyholder pays GST (at 18%) only on the risk element of the premium, whereas the investment component of the insurance plans is not included in the GST calculation. After the GST is implemented, life, motor and health became more expensive as the tax impact has gone up from 15% to 18%.
Impact of higher GST on term plans
Earlier, 15 percent service tax was levied on the premium of term plans. After the GST was implemented, the tax would be hiked by 3 percent to 18 percent. This higher GST will be applicable, irrespective of whether the insurance plans is being bought for the first time or it is being renewed. The GST impact will be 18% in both the cases.
Impact of higher GST on endowment plans
Endowment plans, especially the ones from LIC, have been historically very popular. Previously, these plans used to attract a service tax of 3.75% (1/4th of 15%) on the insurance premium. Under the GST regime, the tax rate stands enhanced to 4.5% (1/4th of 18%). In case of renewal of endowment policies, the GST is payable at half the first year rates.
Impact of higher GST on health plans (medical insurance) and others
Since the health plan insurance premiums are anyways sunk costs, they will be treated as equivalent to term plans and hence the GST will be levied at 18% of the total premium payable. The same logic will apply for other forms of non-life insurance policies like asset insurance, travel insurance, fire insurance, marine insurance etc.
Impact of GST on the insurance costs of individuals
Remember that the insurance premium represents two components viz. the savings component and the risk component. The GST is only levied on the risk component of the insurance premium and not on the investment component of the premium, since risk coverage is a service but investment is not a service. Here are a few important points to note.
Gross premium will be reduced by the amount allocated for savings or investment on policyholders’ behalf. The GST will only be levied on the risk component of premium.
What about single premium annual policies? In such cases, 10% of the single premium would be charged from the policyholder as upfront GST payable.
In all other cases where the demarcation is not too clear between risk and investment, 25 percent of the premium for the first year and 12.5 percent of the premium in the upcoming years will be charged as GST.
In the case of term policies the total premium paid by the policyholder is towards the life insurance’s risk cover and therefore 18 percent GST would be levied on the total premium paid by the insured.
In a nutshell, the higher GST is definitely going to increase the cost of insurance cover but the overall impact may be really quite marginal.