Insurers are set for a minor alteration on their Unit Linked Insurance Product (ULIPs) offerings once the Direct Tax Code (DTC) comes into effect. There would be a change in the ULIP structures with a higher life cover being offered to qualify for tax benefits.
As per clause 70 of the DTC, 2010, only insurance policies where the annual premium paid does not exceed 5% of the capital sum assured will qualify for deduction. This means that the minimum life cover should be 20 times the premium paid. Presently under the current guidelines, insurance companies are required to offer a minimum cover of 10 times the premium paid in a year.
A senior official with a leading insurance company said that if the DTC comes with the guideline then they would do it. Insurance companies would move towards building product structures that qualify. Most insurance companies are ready to do this as majority of the insurance products are sold in the name of tax savings.
This move will make ULIPs into more of an insurance product. While the returns on investment will go down, the insurance cover will increase.
The insurance regulator IRDA had specified to increase the life cover on the premium paid from 5 to 10 times and almost all ULIPs follow the specifications. Insurance firms, however, seem keen on changing the product structure to qualify for the tax benefits as specified under the DTC.
The move will make ULIPs less savings oriented and more protection oriented. Even as the primary role of an insurance plan is to provide protection, ULIPs have always been more oriented towards investment and have been sold as investment products. In 2010, there was a clash between SEBI and IRDA, when SEBI took up the issue.
While the government resolved the issue, the IRDA later brought in several changes to the ULIP structure.