How GST will affects the Insurance Premium

Karunesh, a garment manufacturer in Banglore, is a financially organized individual. As a part of his financial planning, he has taken an adequate amount of life insurance, home insurance, motor, and health insurance policies to protect his family and his properties against any financial loss. Karunesh allocates a substantial amount of money annually to pay premiums for his multiple insurance policies. GST affects the Insurance Premium, and it’s true, and it’ll affect our pocket; it’s also damn true.

Though Karunesh is aware of the new GST Bill being passed in both the houses of the parliament, at the same time, he is keen to have a basic understanding of the GST. Karunesh also intends to know how the new GST bill will impact his existing financial investments and outflows, like the yearly payout of insurance premiums. He is keen to know that GST affects the Insurance Premium.

Let us take Karunesh through some essential aspects of the GST bill and the implication for his insurance premiums.

Goods and Services Tax (GST)

GST Bill was come out in Lok Sabha on the 8th of August 2016. It will be a single tax option on the goods and services purchased. GST bill will dilute numerous other taxes levied by the state and the center separately. GST will eliminate the cascading impact or double taxation of the taxes on the product or service availed.

The tax rates imposed more than once in making the product or service until it reaches the end consumer result in an increase in the price of a good or service. With the GST reform, the incidence of the taxes paid at different intervals in the value chain will be minimized, benefitting every party involved in the value chain.

GST will architect the current tax structure of the country by merging multiple taxes into one tax, and this tax structure will be simpler and less cumbersome.

Impact of GST on Insurance Premium

The government has set up a GST Council, led by the Finance Minister, Mr. Arun Jaitley. The GST council will be responsible for setting up the GST rate. The proposed GST rate is either 18% or 22%, which is higher than the current service tax rate of 15% (14% basic service tax plus 0.5% Swachh Bharat cess and 0.5% Krishi Kalyan cess).

The proposed GST rates will surely increase the insurance premium payout for Karunesh and others as well from April 2017 or later. The insurance premiums will rise by 3% (300 basis points) or 7% (700 basis points) basis the proposed GST Tax rate of either 18% or 22%.

Life Insurance Premiums

The term plan premium for Karunesh will be anticipated to rise by 3% or 7%, and this will put a huge impact on the affordability of basic life insurance plans in the country. Term plans are considered to be the most affordable plans as these plans are pure protection plans with no investment component attached to such plans. This is why the premium for a term plan is lower and affordable as the plan only provides a death benefit during the policy term.

Endowment and ULIP premiums are currently charged service tax at a differential rate, which is 3.75 % for the first premium and 1.88% for the premiums paid for the second year onwards. With the implementation of the GST rate, the premiums are anticipated to rise to 4.50%  (if the GST rate is fixed at 18%) or 5.50%  (if the GST rate is fixed at 22%) for the first year. The GST rate applicable will be 2.25% or 2.75% for the subsequent premiums.

Nonlife Insurance Premiums

Karunesh’s health insurance premium, motor insurance premium, and home insurance premium, which are part of the non-lifestream of the insurance industry, will also see an anticipated rise to 18% or 22% from the current level of service tax of 15%.

Key takeaways for Karunesh

• GST rate will undoubtedly be more than the current service tax rate, which will certainly increase insurance costs.
• Continuation of concessional or differential rates on Endowment & ULIPs is still to be decided by the GST council, which will define the attractiveness of such insurance plans.
• Health, motor, and other non-life insurance premiums are likely to rise as well. Since nonlife policies are short-term contracts ad needs to be renewed annually, Karunesh needs to analyze and compare the policies offering maximum benefit with the lowest cost, post-implementation of GST.
• The exact amount or percentage of the rise in insurance premium will be known once the final GST rate is fixed.

Karunesh needs to re-frame his financial plans and should consult his economic advisors. Insurance is an important risk mitigation tool that cannot be avoided or discontinued. Karunesh must analyze his financial outflows and be prepared to create a little more space for the accumulation of his insurance premiums with the increase in the premium cost. A comprehensive cost and benefit analysis of the insurance policies will fetch Karunesh the maximum returns and complete financial protection.

GST affects the Insurance Premium

As we all know, Insurance is categorized as per different kinds of services; GST will affect the insurance premium, but how? Just look at the below table, and it’ll clear every doubt you have that these facts will clear the whole misunderstanding about GST and Insurance.

GST Rates; Before & After

Look at that percentage, which is increasing with the new GST rule, and it’ll improve the premium of policy direction. If you think that the company pays the GST amount. You are wrong a little bit because the customer pays the tax amount on the product. So, suppose you are buying an insurance policy. In that case, you will pay the tax and the impact of GST on the insurance policy. This Means GST on our pocket cause directly we are buying the procedure, and indirectly we are paying the tax with the insurance product.