Union Budget 2003 will be a forgettable one for private life insurance companies and memorable for the public sector insurer – Life Insurance Corporation (LIC).

Not much of note happened in life insurance in the budget and what little happened was quite strange. Taking note of the country’s increasing elderly population and their need for a stable source of income post-retirement, the finance minister announced a special pension policy with 9% assured return for people over 55 years. The LIC will issue this policy and the government has pledged to bridge the gap between the LIC’s investments and the 9% assured return.

The 9% assured rate is too attractive to be ignored. Never mind the government’s poor fiscal position whereby it can ill-afford to take such populist measures. While on the one hand the government is assuring 9% on a pension policy it has cut rates on administered schemes (post-office, public provident fund, RBI Bond) by 100 basis points to 8%.

The Finance Minister did some tinkering with Section 88 benefits. The good news first - the Section still allows 15% tax rebate for income between Rs 150,000 and Rs 500,000 and Nil for income over Rs 500,000. Also to compound matters a little, the Finance Minister has added enhanced the rebate limit on child’s education to Rs 12,000 per child, for a maximum of two children This means that earlier those who were investing in life insurance purely for tax benefits have another avenue to claim the Section 88 benefits.

However, private insurers aren’t worried about that. For them, the assured return pension scheme has come as a double whammy. Not only has the Finance Minister snubbed all recommendations to hike tax benefits (from the existing Rs 10,000 under Section 80CCC) for pension, it has gone right ahead and made the LIC a direct beneficiary of government largesse!

A significant budgetary proposal that went unnoticed by most industry observers is the change in Section 10(10D). This section allows for tax exemption of life insurance proceeds. The Finance Minister has proposed to exclude single premium policies (i.e. insurance policies having the amount of premium more than 20% of the actual capital sum assured) from the ambit of this Section. In other words, maturity proceeds from single premium policies will be taxable in the hands of investors. Likewise, premiums on this policy are not eligible for Section 88 benefits. However, any sum received under such a policy on the death of a person shall continue to be exempt from tax. (Read HDFC Standard Life's view on the impact of this change in tax laws)

As things today, the dice is heavily loaded in favour of the LIC. If you are over 55 years and are looking for a pension plan, you don’t need us to tell you where you should be investing your money. However, for other products like term assurance, endowment, loan term cover and children’s policy, the field is yet wide open and investors can still make an unbiased choice.

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