The SBI Life Smart Income Protect advertisement claims to give tax-free returns with fine print saying “consult your tax advisor for details”. Find out what kind of returns you can expect and whether the product will really give tax-free benefits?
SBI Life Smart Income Protect is a traditional life insurance plan which gives guaranteed annual payouts of 11% of Sum Assured (SA) over a period of 15 years after plan maturity. While the guarantee itself is insignificant considering that assured returns will be less than 2.5% per annum (pa). A lot will depend on the non-guaranteed bonuses to give decent returns. But, will your returns really be tax-free as claimed in the advertisement?
There is fine print which says “consult your tax advisor for details”. It seems to be a standard disclaimer from insurance companies which want to claim tax-free returns, but don’t want to be held responsible for it. The ad claims "Delights guaranteed. Year after year". You don't want "Regrets guaranteed. Year after year". Moreover, in this product, SBI Life probably knows that policy term of five and 10 years can never give tax-free returns, but will not make such an open declaration as it helps them to remain vague about it.
It is only in the case of a policy term of 15 years that the product will qualify for tax benefits under Section 10 (10D). This is because only in this case the insurance cover is more than 10 times of the premium to be paid. The caveat here is standard health. If you are not healthy, your premium will be loaded and you may not even meet the requirement of tax-free benefit.
The Finance Bill 2012 had made it mandatory that the sum assured should be 10 times the annual premiums (the earlier limit was five times) for insurance policies to enjoy the tax benefits on contributions under Section 80C and on maturity under Section 10(10D).
The product offers policy terms of five, 10 and 15 years. At the policy maturity the customer will get vested bonuses and terminal bonus, but both are non-guaranteed. The payout period will pay guaranteed 11% of SA every year for 15 years. Considering just the guaranteed payout, the returns will be less than 2.5% pa. Assuming 6% pa non-guaranteed returns during the policy term, the real returns will be less than 4% pa; with 10% pa non-guaranteed returns, the real returns will be 5% pa. This is in sync with traditional products wherein the actual returns will be low.
Even 80C tax benefits at entry cannot be claimed in full for SBI Life Smart Income Protect policy term of five and 10 years. If the insurance cover is less than the minimum amount specified, the amount that can be claimed for tax savings under Section 80C reduces proportionately. It means your premium has to be sufficiently higher to be able to claim Rs1 lakh 80C taxable income deduction.
For example, a customer of age 33 years buying the product for policy term of 10 years will have annual premium of Rs119,390 for a SA of Rs10 lakh. The SA is only 8.37 times the premium and hence the amount claimed under 80C will be Rs99,929 for premium payment of Rs119,390. But, you will not get any tax benefit on maturity under Section 10 (10D).
Read the latest Moneylife cover story (issue dated 21 March 2013) “Pension & Life Plan: Tax-traps?” for some secrets on pension and life insurance taxation that insurers will not tell you about. The magazine will be available in the market on 7 March 2013.
Third-party (TP) claims are undoubtedly a drain on insurance companies, primarily due to unlimited liability amounts, but should IRDA base the TP premium pricing on more than just engine cc? Your TP premium may be subsidising the commercial vehicles responsible for insurance companies’ losses
The Insurance Regulatory and Development Authority (IRDA) has proposed an increase of nearly 40% in third party (TP) motor insurance for private cars in its draft on revision of premium. If you drive a car that’s below 1000cc (Tata Nano and Maruti Alto, for example), your TP premium may increase by 85%, come April 2013. High increase in premium for entry-level cars may be because these cars are purchased by those who have just acquired their driving skills and the possibility of higher TP claims arising from them. Surprisingly, the hike will be only 1.4% for cars such as Hyundai Santro and Maruti Swift, whose engines are between 1000cc and 1500cc. For cars over 1500cc, including Fiat Punto and Ford Ikon, the hike will be of 43%.
According to Mukesh Kumar, Head-HR, marketing and strategy planning at HDFC ERGO, “The vehicles in the private car segment with engine capacity exceeding 1500cc are extensively used, usually for longer distances and, therefore, result in higher risk exposure. This leads to relatively high TP losses due to which the hike in premium is justified.”
For goods-carrying vehicles, there is a proposed decrease in TP premium for those not exceeding 12,000 kg. There is hike of 107% for those vehicles in the 12,000-20,000 kg range. Mukesh Kumar says, “The proposed hike is still inadequate for this class, judging from the loss experience. Vehicles with higher tonnage are used for longer distances, mostly inter-state. Therefore, the risk exposure is higher.”
According to Dr Amarnath Ananthanarayanan, CEO and MD, Bharti AXA General, “The TP business is long-tailed, with no upper limit on the claim amount and no limit for when the claim can be filed. This makes risk evaluation and therefore, pricing extremely complicated. Overall industry data may be able to throw light on whether the pricing is adequate to cover the risk. The rate increase is high, but necessary, given the unlimited claim amount for TP. We hope the Motor Vehicle Act is changed to limit the claim amount so that the industry can pass on lower TP premiums to customers.”
Own Damage premiums are based on numerous parameters like car model, location, fuel option, security system and even consider personal data like age, marital status and occupation. The question that one may have is whether engine cc is a good enough parameter to decide the TP premium? There may a need to look beyond the car engine cc to decide the TP premium.
For example, geographical area of a private car will have different TP claims experience. For commercial vehicles, there will be more TP claims for those with an all-India permit than those plying in specific areas. Vehicles used 24x7 may have more TP claims. There are specific car makes that may be registered as private vehicles, but are used for commercial purposes and hence have more TP claims. Is it true that going by engine cc is too simplistic?
According to Avadhoot Mavlankar, principal officer, Shinrai Insurance Broking Services, “Use of the vehicle and geographical area can help to underwrite the TP risk properly. Some of my clients’ loaders/excavators and goods-carrying vehicles are registered as public carriers, but ply only within a certain vicinity such as New Mumbai. There is hardly any TP claim. The black-yellow taxis and auto rickshaws have the lowest claim experience in the TP segment.” The proposed hike for auto rickshaw and taxi insurance is 11% and 13%, respectively.
According to an industry source, “Many TP claims from commercial vehicles arise from accidents with trucks and tempos with all-India permits. With such vehicles, the risk is higher than with commercial vehicles restricted to a city. The transportation lobby is strong and they are able to keep the TP premium low.”
Many insurance companies are keen to underwrite specific commercial vehicles that are “good risk” for their business. Third-party motor insurance is the only segment where the tariffs are set by IRDA. The Authority has made use of the data available with the Insurance Information Bureau for the experience period of the Underwriting Years (i.e. Policy Years) 2007-08 and 2008-09 in respect of number of policies, claims reported and amount of claims paid up to 31 March 2012.
The TP liability cover, which is mandatory in India, does not provide any benefit to the insured; however, it covers the insured’s legal liability for death/disability of third party loss or damage to third party property.
All stakeholders are invited to provide their comments on this draft proposal so as to reach the Authority, also by e-mail addressed to email@example.com, on or before 1 March 2013.
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