Union Budget 2012-13: Life insurance no longer a savings grace

For those whose primary objective is to build a retirement fund, life insurance as a savings instrument will lose its sheen. However, purchasing health insurance will become cheaper as payments for pre-acceptance medical tests will now be eligible for tax breaks.

The finance minister has doubled the minimum cover requirement under a life policy for it to be eligible for tax breaks. All forms of insurance - including life, health, motor and property - will also become more expensive because of the two percentage point increase in service tax.

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The new limits for tax exemption eligibility under section 80C and 10 (10D) of the Income Tax Act has been revised from the previous sum assured-to-premium multiple of five times to 10 times. This is consistent with the proposal under the Direct Tax Code ( DTC) which seeks to have a higher level of insurance under life policies , but at 20 times.

Until now, life insurance was an attractive avenue for accumulating savings for retirement. Now the gains will be vastly curtailed because a big chunk of the premium will go towards life cover.“Compared to the DTC, the Budget proposal is a welcome move,” said S B Mathur, secretary general of the Life Insurance Council.

An LIC official said those in the higher age group will now find it more expensive to buy a life cover.
According to Bhargav Dasgupta, MD, ICICI Lombard, the tax break of Rs 5,000 for preventive health check-ups will help in bringing a greater focus on preventive health care. General insurers say there’s another indirect benefit - health checks will enable early detection of ailments.

“It may also result in product innovation in the health insurance industry,” said Shashwat Sharma, partner, KPMG.