“Change is only constant,” they say. Change in one thing that ends up impacting the other. The 3 percent increase in GST is going to impact the insurance premium adversely. This article will be your guide regarding the increase in GST and its impacts on your insurance premium.

What is GST?

Goods and Services Tax, popularly known as GST, is a reform for our economy’s indirect tax plan. On 8^th August 2016, GST Bill (which was long pending) was passed in Lok Sabha.

It was possible after a very long journey flooded with challenges, confrontations, and what not. At last, the GST bill has entered the phase of implementation, which will come into effect from July 1, 2017. GST would make changes in the tax structure between the center and the state.

GST is a VAT, i.e. Value Added Tax that will eradicate the cascade effect/ double taxation from the price of goods and services down the value chain. It would surely affect the incidence, structure, and calculation of the indirect taxes, which will lead to a comprehensive refurbishment of the current tax system in India.

The latest GST is expected to freeze at 18 percent under the GST update. This is a bad news for all the policyholders, as this hike will impact adversely on the insurance sector, typically in terms of insurance premiums. Life insurance reach in India has reduced from 4.6 percent in the year 2009 to 2.6 percent in the year 2016. It reflects a no growth at all in the last a few years. The hike in the GST from 15 percent to 18 percent would increase the premium of purchasing a new as well as renewing an existing insurance policy.

The Premium Deciding Factor

Basically, the premium deciding factor of an insurance plan is subject to the insurance plan type you want to purchase. Based on that, we have two major categories of insurance policies – Life Insurance and General Insurance.

Life Insurance

A contract between and individual and an insurer, a life insurance policy provides an assured sum of money to a designated nominee upon the death of the policyholder, which is in exchange for a premium.

Life insurance policies are sub-divided into four categories, i.e. Term plans, Pension plans, ULIPs, and Endowment plans. The service tax levied on these different insurance instruments is also different. A Term plan offers death benefit and is defined as a risk-free plan. The nominee gets the sum assured if the insured person dies during the policy term. The policyholder doesn’t get any maturity benefit in a basic term plan. There are some term plans that offer the return of premium (TROP) benefit. The premium element of a term plan mainly includes the risk component in order to provide an insured person with a risk cover as long as the policy is active.

ULIPs and endowment plans provide coverage benefit and death maturity whatever instance occurs first. These plans compute investment and risk in the premium element and it makes these plans expensive in the comparison with a term plan.

The Impact on your Life Insurance Premium

A policyholder pays service tax only on the risk factor of the premium element, whereas the investment component of the insurance plans usually isn’t included in the service tax umbrella. After the GST is implemented, insurance plans, including life, motor, and health would become more expensive, as taxes would be hiked.

Term Plans

Earlier, 15 percent service tax was levied on the premium of term plans. After the updated is implemented, the tax would be hiked by 3 percent and it will be 18 percent. The individuals buying insurance plans for the first time or renewing their existing insurance policies would have to pay 18 percent GST.

It means that that for the payment of every 100 rupees (towards the premium), a service tax of Rs. 15 was levied, which now it is going to be Rs. 18 as per the updated tax plan. To be precise, the premium will be increased by 3 percent.

Endowment Plans

Endowment plans are considered as one of the traditional insurance saving plans. Previously, these plans used to attract a service tax of 3.75 percent on the insurance premium while buying an insurance plan. Now, it would be increased to 4.5 percent as per the updated tax regime. Now, the policyholders are supposed to pay 1.88 percent service tax on the premium payment of their endowment plan(s) if they are renewing it for the second time.

General Insurance

A General Insurance policy also refers to a contract between and insurer and an individual, which provides an assured sum of money as compensation for loss caused by a natural or manmade scenario. The policy could be issued for healthcare, home, travel, automobile etc.

Health Plans

As of now, the health insurance policies (standalone as well as a family health plan)charge 15 percent as the service tax on the premium. After the updated GST is implemented, the medical insurance plans would be costlier such as mediclaim policy for senior citizens. It would attract an increase of 3 percent in its tax regime, making it 18 percent that will be charged on the premium from 1^st July 2017.

Travel Insurance

Those who are looking forward to traveling abroad anytime soon will also have to pay an additional tax of 3% as the new GST will be in effect from July 1. The customer will now have to pay 18% GST instead of 15% service tax earlier in effect. So, if you don't want to pay more money than buy or renew travel insurance before 1st July 2017.

Automobile Insurance

Automobile insurance premium includes 15 percent as the service tax. It will be hiked to 18 percent when the tax rate is frozen up to this particular percentage. If you are die heart fan / lover of your car & two wheeler then it's best time to renew your policy with auto insurance companies so that you can save your money & plan to travel somewhere with your family.

What would be the ideal way out for the insurance buyers?

It is of utmost importance for a person to safeguard his/her life. This becomes even more important in case a person is the sole bread winner in his family. Life insurance policies, particularly the term plans, are the life insurance plans in the true sense. These policies provide the coverage to you and compensates financially so that when you are not there, you can still look after the financial needs of your family members.

When you look forward to buying an insurance policy, pay your undivided attention to the variants of the insurance plan, including its overall benefits, disadvantages, inclusions, exclusions, policy coverage, policy term, its premium etc. Keep in your mind that premium should not be the only criteria for selecting or rejecting an insurance plan. Otherwise, you would end up depriving your family of the overall financial coverage that they rightfully deserve if you are no more because of any unfortunate incident, such as death, total or partial disability, terminal illness etc.

Thanks to the rise in the insurance premiums, a storm would be triggered and there would be a cut throat competition between the insurance providers to offer best of the best insurance plans to their potential clients. This would be beneficial for them as far as their financial future is concerned.

It is recommended to draw a comparison, shop around, and then purchase an insurance plan that suits your insurance requirement, structure, objectives, liabilities, and budget of you and your family.

The Relationship between the GST Rule and Life Insurance Business

The insurance policies’ premium represents two components- savings and risk coverage. The service tax is levied specified only on the premium component.

According to the GST rules, the value of service on which the GST is levied regarding the life insurance sector shall be accordingly.

1. The gross premium would be reduced by the amount allocated for or savings or investment on policyholders’ behalf.
2. When it comes to the single premium annual policies, ten percent of the single premium would be charged from the policyholder.
3. In other cases, 25 percent of the premium for the first year and 12.5 percent of the premium in the upcoming years will be charged. For example, if an endowment plan’s premium is Rs. 100, then the 18 percent GST would be levied on the 25 percent of premium (which would be Rs. 25) the GST would be Rs. 4.50.
4. In case the total premium paid by the policyholder is towards the life insurance’s risk cover, only the 18 percent GST would be levied on the total premium.

Because of the increased GST percentage that awaits the implementation. The overall impact of the GST would be the increased expenditure (premium and the increased GST), when it comes to term insurance and endowment plans.

The policyholders stand a chance to be benefited if the insurance providers get a green signal on the input tax credit benefit. Unfortunately, as of yet, it is still unclear since the center/state GST structure is very complex. It might create confusions and conformity for the insurance buyers and increase the administrative expenses for the insurance providers. If the insurance buyers remain confused about the GST update, then irrespective of the increase or decrease in the prices, the solvency of the market along with the financial strength will be adversely affected.

The general insurance sector will be equally impacted. The overall outgo for health, car, and various non-life plans would be increased by 3 percent.

Post GST implementation, the existing and new insurance buyers would have to bear the updated prices. For example, the current insurance premium of a term plan is Rs. 10,000, (without the 15 percent service tax) the updated GST will increase the premium comprising taxes by Rs. 300. It means from Rs. 11,500, it will be changed to Rs. 11,800.

When you compare insurance premiums, especially for the term plans, ensure that you look out for the premiums including or excluding GST by the various insurance providers. There should be no changes in the selection process, as the GST impact is the same for all the insurance providers. Follow a proper selection process in order to get the right insurance plan that offers you maximum coverage and fulfills your insurance expectations. This table will help you to get a better understanding of how the updated GST impacts the various insurance products and to which extent.

GST Rates: Before and After

New Insurance Rates After GST
Insurance Product	Before	After	Applicability
Term Insurance Premium	15	18	On the entire premium amount
ULIP	15	18	On the premium amount minus the investment amount
Health Insurance Premium	15	18	On the entire premium amount
Add-on Riders Premium	15	18	On the entire premium amount
Periodicity - Single Premium	15	18	On 10 percent of the total premium. It means that the previous 1.5 percent of the total premium would be hiked to 1.8 percent of the total premium as per the updated GST rates.
Endowment Plan Premium (First Year)	15	18	On 3.75 percent of the total premium
Endowment Plan Premium (Renewal)	15	18	On 1.875 percent of the total premium
Car Insurance	15	18	On the entire premium amount
As of now, service tax comprises of Swacch Bharat Cess (SBC) along with the Krishi Kalyan Cess (KKC).

Wrapping it up!!!

Though the hike is nominal, the increased insurance premiums seem too much for a major section of policyholders. If someone is spending Rs. 50,000 on the annual premium for home, motor, medical, personal accident insurance, and term plan, they will have to pay 18 percent more. They won’t get any additional benefits or coverage. In this article, you got to know about the impact of the updated GST on the insurance sector. In true sense, the real impact of GST on the policyholders will come out after its implementation. For the existing policyholders, as of now, there is no change required to be made prior GST implementation.

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