| Calcutta, March 21: Come April, your life insurance premium will go up, thanks to the tax changes finance minister Pranab Mukherjee has proposed for insurers in his Union Budget for 2012-13. Mukherjee has raised the minimum alternate tax to 18.5 per cent against 12.5 per cent at present for life insurance companies, which will impact premiums. "The increase in the MAT rate in this budget, if not rolled back, will result in higher premium rates for life insurance policies that would be launched post-April," said Vivek Mathur, chief financial officer, Tata AIG Life Insurance Company. "Insurers will now have to factor in a higher MAT rate of 18.5 per cent while pricing their new products," he added. The entire business model, including products, will have to undergo a change because of the new rates, he said. Moreover, the proposal to increase service tax will be passed on to policyholders in the form of higher premium. "The increase in service tax to 12 per cent from 10 per cent at present will immediately translate into a 2 per cent increase in premium rates for term insurance policies," said G.N Agarwal, chief actuary at Future Generali Life Insurance Company. Since 2004, life insurance companies are required to pay service tax on the risk premium — that part of annual premium that goes toward covering the life risk of the policyholder. Term assurance products, being a pure risk product, the service tax is calculated on the entire premium. As of now, the practice is that insurers explicitly charge this service tax along with the base premium from policyholders. "Following the increase in service tax in the budget, the premium of all term insurance products will immediately go up by at least 2 per cent," Agarwal said. The premium rates for savings-linked life insurance products, both traditional or unit-linked, will also go up but to a lesser extent. As it is difficult to segregate the part of the premium that goes to cover the risk of life and the part that goes towards the savings fund, insurers were allowed to pay a service tax of 1 per cent on the gross premium (collected under these products) since 2004. Only last year, Mukherjee increased this rate to 1.5 per cent. The finance minister has now proposed to increase the rate to 3 per cent for the first year premium collection and 1.5 per cent thereafter. "If the insurer is not willing to absorb the service tax burden and take a hit on profitability, the tax burden will be passed on to policyholders," Agarwal said. "However, the increase will be for the first year (that is, 2012-13) since the tax rate for subsequent years is 1.5 per cent, which is same as now," he said. The finance minister's third proposal may force life insurers to withdraw single premium as well as some regular premium policies. The eligibility of life insurance premium for deduction under Section 80C and exemption under Section 10(10D) has been changed. So far, a policyholder can claim deduction up to Rs 1 lakh a year for payment of premium provided the sum assured of the policy is at least five times the annual premium. Besides, any payout from the policy is tax exempt. Mukherjee has changed the eligibility for life insurance under Section 80C as well as Section 10(10D). From April 2012, a policyholder can claim deduction under Section 80C for premium payment only if the sum assured is 10 times the annual premium. Moreover, only those plans that satisfy this condition will be eligible for benefits under Section 10(10D). However, the conditions are applicable for policies sold after April 1, 2012. | 
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