The imposition of GST on life and health insurance makes the premiums more costly and less affordable for people
Several politicians and ministers have expressed concerns about the high goods and services tax (GST) currently imposed on life and health insurance policies. According to them, this move is only a big impediment to India’s vision of “Insurance for all by 2047.”
On August 7, 2024, Finance Minister Nirmala Sitharaman addressed the calls by protestors to withdraw the GST of 18 per cent on health insurance. She asked protestors to talk with their respective state finance ministers as 75 per cent of the GST revenue goes to the state. This amount is a major revenue stream for state governments. She also said that taxes were imposed on health insurance premiums even before the introduction of GST.
“There is an ongoing discussion and growing pressure from various stakeholders, including political leaders and industry bodies, to reduce or even eliminate GST on health and life insurance products. The rationale is clear: if we are to achieve the vision of ‘Insurance for All by 2047,’ we must make these products more accessible to the average Indian,” says Aditya Mall, appointed actuary, Future Generali India Life Insurance.
At present, there is an 18 per cent GST on all health and life insurance policies. Before the implementation of GST in 2017, there was a 15 per cent service tax on insurance premiums, which included basic service tax, Swachh Bharat cess, etc. The switch from 15 to 18 per cent GST increased premium amounts.
The high GST rate means high insurance premiums for the people. As GST is an additional expense on the premiums paid by people for life and health insurance it increases the overall premium cost. Let us understand the high GST impact on insurance premiums with a simple illustration:
Madhav, a 32-year non-smoker, salaried individual bought a term plan to secure his family financially. Let’s see how GST impacts his term insurance premiums. His yearly insurance premium excluding GST would be Rs 14,717. When we include GST the total premium would be Rs 17,367. It’s the difference of Rs 2,650.
“The insurance premium has been increasing every year basis the claim experience and the policyholder age by 10-20 per cent. This is making coverage at higher ages difficult to sustain, especially with senior citizens and lower income group. The relief in the GST will bring down the premiums and make the product more affordable,” says Shilpi Arora, chief operating officer (COO), Insurance Samadhan.
In this context, it would be important to find out how high GST would affect life and health insurance premiums and the policyholders:
What It Means For Policyholders: “For policyholders, this means either having to pay more for the same level of protection or, in many cases, opting for lower coverage to keep premiums within their budget. The result is often underinsurance, which leaves families vulnerable to financial shocks in the event of health emergencies or the untimely death of a breadwinner. Insurance is meant to be a safety net, but high GST rates are making it more of a luxury that fewer people can afford,” adds Mall.
The imposition of an 18 per cent GST on health and life insurance premiums has a direct impact on the affordability and accessibility of these essential financial protection products. This significant tax burden increases the overall cost of insurance, often making it difficult for many individuals and families to secure adequate coverage.
“The imposition of GST on life and health insurance makes the premiums more costly and less affordable for people. Insurance is considered the best investment. But 18 per cent GST on life and health insurance premiums will make it a less popular investment option for people,” says Naval Goel, founder and CEO, PolicyX.com, an insurance web aggregator.
“In life insurance, if an endowment product is bought, the customer pays Rs 1.18 lakh as a premium but his investment will be considered as Rs 1 lakh (further mortality charges and expenses are deducted), Rs 18,000 being the GST element. This results in lower returns because the policyholder calculates the total paid and the return he has received. He often feels cheated and trust in insurance products is lost,” adds Arora.