ULIPs to cost more with service tax hike

The government has proposed a hike in service tax on life insurance policies from 1 per cent to 1.5 per cent, in a move that would increase the premium cost for policyholders.

According to knowledgeable sources, the proposed hike in the service tax on life-insurance products would render Ulips - both traditional and unit-linked insurance plans - more expensive. The industry says the costs could go up by 50-75 basis points (one bps = 0.01 per cent).

Though the exact impact of the proposed increase has not yet been figured out by the companies, most insurance executives expect premiums to be up around 75 basis points.

An Economic Times report quoting SB Mathur, secretary-general of Life Insurance Council, said policies would get costlier with the increase in service tax. While traditional plans would cost nearly 50 basis points more, he said, Ulips may cost 75 basis points more.

The budget proposals for FY12 include a 50 per cent increase in service tax for traditional plans - where investments from the premium collected are made as per the regulatory guidelines. Currently, service charge is charged at 1 per cent of the total premium from policyholders of traditional endowment or money-back plans.

In Ulips, in which the policyholder chooses the investment mix (how much to put in equity or debt), the service tax would be charged on the portion of the premium not allocated for investment - like premium allocation and policy administration charges. Currently, service tax is levied only on mortality and fund management charges.