Service tax makes life insurance expensive
Health Financing/Insurance

Service tax makes life insurance expensive

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Once the Union Finance bill 2011 is passed, the service tax will make life insurance policy more expensive. There were two proposals announced in the budget relating to insurance: firstly life insurance will cover all services and secondly, service tax will be leivied on the insurance other than the investment money. This has increased the composition rate be increased from 1% to 1.5%. In a ULIP plan, the service tax will be levied and will also cover other services to the policyholder as per new budget this year. There are four cost heads in the policy which gets deducted as the cost of insuring you and fund management charge deducts a cost for managing your investments. The other two policy allocation charge, policy administration charge are costs that get deducted to service the policy. This makes your payout returns constant but have to pay Rs. 721 as tax as stated by V. Srinivasan, chief financial officer, Bharti AXA Life Insurance Co. Ltd. Also for a 15-year policy the returns will come down by about 30 basis points. In a traditional policy, only the insurance cover is charged and the service tax is levied on the entire premium. The rate remains 10.3 percent for the tax and hence the plan is not that expensive unlike ULIP. With the budget 2011 the increase in service tax and the proposed direct taxes code is increasingly getting expensive. People should not be encouraged for long term savings which will end up them up in a fix rather should keep insurance and investment needs separate.

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