GST (Goods and services tax) after its passing has changed the tax architecture between center and the state. It is added value tax which will eradicate the flowing effect or double taxation effect on the price of goods as well as service down the worth chain. It is considered that the superior tax rate will have an undesirable effect on the industry of life insurance industry and the price of the insurance products at large.
With the predictable increase in the service tax rate from 15-18%, the price of purchasing the insurance and keeping the plan active will rise slightly. The premium of an insurance plan mainly depends on the type of an insurance coverage, you are purchasing. The policies of life insurance are generally categorized as:
- Term Plans
- Endowment plans
Term plans: Term plans mainly provide death benefit and are named as pure risk protection plus which is sum assured is compensated to the nominee; if the policyholder dies during the tenure of policy. The premium component of this plan mainly comprises of the risk element for providing the policyholder a risk cover throughout the term of the policy.
Endowment plans and ULIPs: ULIPs as well as endowment plans provides both maturity and death benefit. These types of plan have an element of both investment and risk in the premium component which makes it costly comparatively to a term plan.
Effect of GST on insurance premium
- An insured person generally compensates service tax on the risk constituent of the premium part whereas the saving element of the plans is generally out of the service tax scope.
- In Term plans at present service tax of 15% is obligatory on the premium price of the term plans.
- Endowment Plans at present attracts the service tax of 3.75% on the premium in the initial year of the plan is expected to increase 4.5% in the primary year under the new tax rule.
- With the execution of the GST, the price of buying the health insurance will be costly as it will attract the tax of 18% on premium from 2017.
- The premium of motor insurance also attracts 15% of the service tax which will improve to 18 %, if the cost is fixed up to this particular percentage mark.
Perfect way out for the customers
It is very essential for a person to protect his or her life particularly when he is the sole earner of the family. It is also important to look the type of insurance policy in a holistic manner. This includes its inclusions, advantages exclusions, policy tenure and its rate or premium also. With the rise in the premiums of insurance there will be a tough competition among the insurance companies for providing the good insurance policy to the patron which will actually beneficial for the customer. Premium of insurance distant from risk element also includes expenditures which are related to the intermediary commission and policy issuance which could be lessened by the insurance companies for compensating the effect of improvement of service tax in the new GST period.