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Insurance Before GST: Should You Buy Before 1st July or Not

Insurance Before GST: Should You Buy Before 1st July or Not?

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Hence, any changes in taxation are definitely going to leave an impact on insurance markets. That is the reason, introduction of GST (Goods and Services Tax) will affect the insurer's business largely and the prices of insurances thereof. Lok Sabha passed the long pending GST Bill on 8th August, 2016, wherein the indirect tax system (multiple/various taxes) which has a cascading effect due to double taxation on goods and services, will be replaced by uniform GST. This shall come in effect from 1st July, 2017.
Is it going to affect the insurance industry positively or negatively?

Is it advisable to buy insurance before 1st of July, 2017?

Let's find out!
It has been established that GST is a value added tax, which is being brought in implementation to eliminate adverse effects of current multiple taxes on costs of goods and services, down the value chain. Therefore, this new tax reform, with the new service tax rate anticipated to be fixed at 18%, will leave a not-so-favorable effect on insurance industry and cost of insurance products.

Let's find out!
It has been established that GST is a value added tax, which is being brought in implementation to eliminate adverse effects of current multiple taxes on costs of goods and services, down the value chain. Therefore, this new tax reform, with the new service tax rate anticipated to be fixed at 18%, will leave a not-so-favorable effect on insurance industry and cost of insurance products.

  • The reason is that with GST in picture, service tax will be increased from 15% to 18%, hence the cost of buying and maintaining insurance is going to go high.
  • This is because, when you buy an insurance policy, you pay the service tax on the Risk element of premium. The risk being, the payment (term policy) made by the Insurer to you, if something happens to you. You are not paying any service tax on investment that you are making in buying insurance. After GST implementation, all insurance policies including term, health, and car will become expensive as the service taxes rate will go high from 15% to 18%. Which is by minimum 300 basis points, where one basis point stands equal to 1/100 of percentage point. This stands true for Policy renewal too.
  • The traditional insurance savings plans, better known as endowment plans currently attract a service tax of 3.75% on premium, in first year. This will see an hike up to 4.5%, which will prevail for the first year of GST. In second year the current tax slab on endowment plans is 1.88%, which will be 2.25% after the implementation of GST, second year onwards. Hence, the maintenance of endowment plans will also become expensive.
  • Talking of Health Insurance, the present rate of tax is 15% on premium, which is again rise up to 18% after GST. Same is the case with Car Insurance. GST of 18% will be levied upon every motor insurance policy you buy.

All in all, the overall cost of insuring life and assets, and making investments in insurance based products, is definitely going to rise as GST comes in force. This indicates, that buying a long Term effective plan or term insurance before GST, to secure your life, is going to be a smart move.

Moreover, as the cost of insurance is likely to go high, the insurance market is going to become even more competitive, before the implementation of GST. The insurance provider companies are going to offer the best possible insurance products with maximum benefits to consumers. There are other intermediary costs associated with insurance premiums, such as issuance cost, agents' commissions etc. The companies are going to lower these costs to make as much sales as possible, to compensate the effect of enhanced service tax, pro GST.

If you plan to buy insurance before 1st July, 2017, which is actually a sensible move, you must go for term plans. Life insurance or term plans are the most suitable plans one can invest in, because they provide comprehensive Coverage to the Insured individual and provide for the family in the absence of the policyholder.

Other investment plans are also going to make a suitable choice only if you compare smartly.

Before you buy, you must compare the insurance products to match with your financial requirement, investment needs, tax structure, your liabilities, future objectives, cost and your insurance budget.The reason is that with GST in picture, service tax will be increased from 15% to 18%, hence the cost of buying and maintaining insurance is going to go high.