Your Insurance Premiums May Reduce. Here’s Why

The Goods & Services Tax (GST) on insurance premiums, as you know, is currently 18%. Various trade bodies or associations ahead of the budget urged the finance minister to reduce the GST to 5% --- citing the fact that health premiums have gone up considerably in the last five years, particularly after the COVID-19 pandemic and, as a result, the renewal rates of the policies coming down. In other words, quite a few policyholders are not able to afford to pay the premium of health insurance policy bought.

However, the finance minister didn't give a hoot to this genuine and reasonable demand. The GST rate was kept unchanged at 18% -- the highest tax rate compared to what is imposed by other countries.

This approach of the Modi 3.0 government even drew criticism from their own cabinet minister, Mr Nitin Gadkari. "Levying GST on life insurance premiums amounts to levying tax on the uncertainties of life. The person who covers risks of life uncertainties to give protection to the family should not be levied a tax on premiums to purchase cover against the risks," he wrote in a letter addressed to his colleague in the government, finance minister, Ms Nirmala Sitharaman.

Mr Gadkari also expressed that 18% GST on health insurance premiums is proving to be a deterrent for the growth of this segment of business, which is socially necessary, and therefore made a request for the withdrawal of GST on health and life insurance on priority considering that it has become cumbersome for senior citizens.

Many opposition party leaders also wrote to the finance minister on this issue and requested an urgent review of the matter.

Moreover, the Standing Committee on Finance, in its 66th Report submitted to the parliament, also made a recommendation in February 2024 to lower GST on health insurance, particularly retail policies for senior citizens, the microinsurance policies (up to the limit prescribed by PMJAY), and on term insurance policies.

Against this backdrop, now the GST council chaired by Ms Sitharaman and state finance ministers, in a meeting on September 9, 2024, after discussing this matter, are likely to exempt term life insurance policies and health insurance policies from GST.

Note, in the case of life insurance, the policies that come with an investment benefit, i.e. insurance-cum-investment plans, will not be exempted. In other words, ULIPs, moneybacks, endowment plans, etc., offered by life insurance companies would continue to be costly with an 18% GST levied.

In other words, only term life insurance plans that provide death benefits to the insured, indemnify the risk and offer financial security to the family, will be exempt from GST, thus making the premium even more affordable. More individuals could be attracted to term life insurance plans, which are essential to one's financial planning.

Similarly, the health insurance policies that indemnify the insurance against medical emergencies, going forward being exempted from GST, will encourage individuals to increase their insurance coverage. For senior citizens and retail individuals, particularly, it would be a big relief, as it implies a reduction in health insurance premiums.

Overall, this move of exempting GST is expected to augur well for the insurance industry. The insurance penetration as a percentage of GDP would increase from around 4% currently and help achieve the IRDA's target of "Insurance For All" by 2047. Simply put, it shall help the government bridge the gap compared to many other economies that have far better insurance penetration.

How Much Will Exempting GST on Term Life Insurance and Health Insurance Cost the Government?

For the government, exempting GST on term life insurance and health insurance is expected to cost the government an annual revenue loss of approximately Rs 3,500 crore, as per the media reports.

It will be a contrast to the past two financial years when GST collected on life insurance premiums significantly increased from Rs 5,354.28 crore in FY2021-22 to Rs 8,262.94 crore in FY2023-24, while on health insurance from Rs 825.95 crore in FY2021-22 to Rs 1,484.36 crore, according to the data presented in the Lok Sabha (the lower of the parliament) in August 2024.

Final Words...

Having a term life insurance and health insurance policies is integral to your financial planning. It is better late than never, that the government is contemplating exempting GST on these insurance policies in the interest of your financial wellbeing, potentially making them relatively affordable.

Make sure that you have adequate life insurance coverage with a term plan considering your Human Life Value (HLV). When computing your HLV, consider the following:

• ✓ Your life expectancy based on your family medical history

• ✓ The life expectancy of your spouse

• ✓ Number of children

• ✓ How old the children are, and how many years they'll be dependent on you

• ✓ Total number of dependents

• ✓ The financial goals you're addressing for the dependents

• ✓ Your monthly household expenses (excluding your personal expenses)

• ✓ Lifestyle expenses

• ✓ Total expenses of dependents

• ✓ Contingency reserve (if any)

• ✓ The assets you own

• ✓ Your outstanding liabilities (if any)

• ✓ Current insurance (if any)

• ✓ The cost of inflation

• ✓ ...and many other finer aspects

When you buy a life insurance cover, the sole objective should be to indemnify risk to your life as the breadwinner and safeguard the financial well-being of the dependent family members. Avoid commingling insurance with investments. Address the two separately.

Similarly, a comprehensive health insurance policy with an adequate sum insured (considering your family's medical history, the pre-existing diseases or comorbidities (if any), the number of dependent family members, the state and city you reside for access to healthcare facilities, the network of hospitals, and the healthcare costs) along with the all-embracing features of the policy (including the no-claim bonus) is important. It ensures peace of mind and adds to one's financial security.

So, make sure you have insured yourself adequately -- for health and life.

Don't base your decision on where the premiums are today, and whether they will reduce or rise going forward. Add to your financial security.

Be thoughtful in your approach.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get PersonalFN’s newsletter ‘Daily Wealth Letter’ and Exclusive Updates on Mutual Funds.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes. Use of this information is at the user's own risk. The user must make his own investment decisions based on his specific investment objective and financial position and use such independent advisors as he believes necessary.