Looking at insurance beyond Tax saving

The underlying concept of insurance is "Insurance is a subject matter of the solicitation", which means that the client or the person proposed to be covered by the insurance cover should seek insurance from the insurance company. But the irony is that insurance is not solicited in our country, but it is sold or rather 'mis sold' in the garb of certain benefits which are sometimes beyond the basic purpose of insurance, that is to safe guard the interest of the survivors or in other words the near and dear ones of the person seeking insurance. The advent of ULIPs had unleashed the beast of rampant mis-selling by the insurance advisers. Thankfully, better sense has prevailed of late and the regulators have come out with stringent norms of disclosure for ULIPs effective September 1, 2010.

Many people still buy insurance primarily to take advantage of the tax gains associated with it. There is no harm in saving a little of your taxes, but the primary purpose of insurance should not be missed. The tax breaks available on an insurance product should merely be seen as add-ons or sweeteners. With the application of the new direct Tax code from 01.04.2012, there are going to be some significant changes on the tax implications of insurance products. Here are the important changes proposed:

• Under DTC the deductions applicable to insurance products (currently defined under section 80C) will be over and above the limit of Rs. 1,00,000, to the extent of Rs.50,000. However, the deduction shall be available only to those insurance policies where the premium does not exceed 5% of the capital sum assured in any year.
• Insurance proceeds shall continue to be governed by EEE (Exempt-Exempt-Exempt) system of taxation, as contributions, accretions and withdrawals under a life insurance policy continue to be tax exempt.
• The maturity proceeds of life insurance policies become taxable, other than in case of death of the policy holder, if the premium paid exceeds 5% of the sum assured. In other cases the insurer company will be subject to dividend distribution tax, which will be deducted from the proceeds of the policy.
• Insurance companies will be subject to normal rates of corporate tax stipulated at 30%, instead of the 12.5% concessional tax paid by them currently. this is likely to increase the cost of insurance for the clients.

All said and done, insurance cover should be seen in the context of the need for insurance, which is based on the security and safety of the dependents in the event of pre mature demise of the individual, rather than the tax breaks associated with the insurance policy.