Why the budget should provide a separate deduction for term insurance

It is often pointed out that life insurance penetration in India is low. In 2020, it stood at 3.2% of gross domestic product (GDP), slightly lower than the global average of 3.3%. Insurance penetration is defined as the ratio of total premiums paid in a given year to the country’s GDP. Interestingly, between 2006 and 2010, insurance penetration in India was 4% or more, and it was below 3% between 2014 and 2019.

In addition, the majority of life insurance premiums paid by policyholders are spent on investment contracts that include some insurance. Most people who purchase such contracts do not have sufficient insurance coverage for their families.

Pure term life insurance, in which a specific amount is paid only in the event of the death of the policyholder, is rarely sold. This can be gauged from the data that Life Insurance Corporation (LIC) of India had shared in its diversion prospectus ahead of its IPO.

In 2020-21, the new business premium (NBP) for term insurance stood at ₹Life insurance NBP grew by Rs 190 crore, a growth of 15 per cent over 2019-20. However, this accounted for only 0.33 per cent of the total NBP for 2020-21. The numbers were slightly better in the first nine months of 2021-22, when term life insurance NBP accounted for around 0.42 per cent of the overall NBP.

Given that LIC sells the bulk of life insurance policies sold in the country, what is true for LIC must also be true for the insurance industry as a whole. In this context, the Indian life insurance industry does not really sell term life insurance. Broadly speaking, there are three reasons for the lack of popularity of life insurance.

First, most people who buy life insurance policies expect to receive a certain amount of money at the maturity of the policy. There is no payout if the policyholder survives the end of the term of a pure term insurance policy. In this sense, people do not really understand the real purpose of life insurance. To correct this anomaly, the insurance regulator and life insurance companies need to conduct a sustained information campaign highlighting the benefits of buying pure term insurance, similar to what the mutual fund industry does. mutual funds sahi hai campaign.

Second, the idea of ​​buying life insurance makes many people uncomfortable because it reminds them of their mortality. There’s really nothing that can be done about that.

Third, the premium for term insurance policies tends to be significantly lower than that for investment-oriented insurance policies. This essentially leads to a situation where insurance agents are not sufficiently motivated to promote term insurance, given that they do not earn large commissions in absolute terms when selling term insurance.

So what can be done about it? Ultimately, pure life insurance is a very important part of financial planning for the future. And families should be encouraged to buy it. One way to do this is to learn from people’s behavior. Many people simply buy life insurance religiously every year to save on taxes. Of course, what they are buying are investment-oriented life insurance policies. Under Section 80-C of the Income Tax Act, the premium up to $150 is $150. ₹$1,500,000 paid into a life insurance policy can be deducted from taxable income.

Therefore, in order to encourage people to take out pure term life insurance, a separate deduction of up to ₹The proposal should be between $15,000 and $20,000 per year. This would be similar to the deduction offered on health insurance premiums. While this will still not encourage insurance agents to sell pure term insurance, the idea of ​​saving more taxes could encourage individuals to buy pure term insurance policies to properly insure their families. If the supply problem cannot be solved, the demand problem must be addressed.

With the budget for the 2023-24 financial year due on February 1, it is an idea that the finance minister and the government may want to consider.

Vivek Kaul is the author of Bad money.