Budget 2012 & impact on insurance: Not all policies will get you tax break, now

At the first glance, there was no significant announcement on the insurance sector in the Budget. However, there are some amendments tucked away in the voluminous Budget documents that could have far-reaching implications on the way you treat insurance. To begin with, all regular-premium life insurance policies issued after April 1, except pension plans, will have to offer a protection cover of at least 10 times the annual premium. Otherwise, they will not be eligible for tax benefits under section 80C and 10 (10D). While 80C allows a deduction on life insurance premium up to Rs 1 lakh, Section 10 (10D) exempts maturity proceeds from tax. Until now, the mandated cover was five times the annual premium. Budget at ET: Budget 2012 | Union Budget | Railway Budget | Budget News | Economic Survey of India Both unit-linked insurance plans (Ulips) and endowment plans will be affected due to this change. However, most term plans will fulfill the new requirement. "This is a welcome move as it will ensure a minimum life cover to the policyholders. The new requirement will ensure that they have some protection over a longer period of time," says Kamalji Sahay, CEO, Star Union Dai-ichi Life. The other tinkering include change in definition of sum assured, lowering the age of senior citizens to claim tax breaks on health insurance premium, extra Rs 5,000 on preventive health care and so on. Change In Plans Clearly, the government is nudging individuals to buy pure life or protection policies (term plans, in other words) than the more popular insurance-cum-investment plans such as Ulips and endowment. Since a bigger chunk of the premium will go towards mortality charges due to the mandatory higher life cover, the devotees of Ulips and endowment plans would be left with relatively small amount for investment. "A person not looking for a pure protection cover need not buy a life policy at all. Instead, if their objective is wealth-creation, they can direct their funds to instruments like public provident fund ( PPF), tax-free infra bonds and highly-rated non-convertible debentures (NCDs)," advises Suresh Sadagopan, certified financial planner, Ladder7 Financial Advisories. "In terms of equity, depending on their risk appetite, they can invest either directly in stocks or through mutual funds. Based on their risk-taking ability they can choose from large-, mid- and small-cap funds." For solely your protection requirements, you need not look beyond term policies - the cheapest form of life insurance.