GST Rate Cut: Health-life insurance has become cheaper, but not as much as you are thinking..

GST Rate Cut: Till now, when a person used to buy a health insurance or life insurance policy, he had to pay 18% GST on the base premium. That is, if someone's premium was Rs 10,000, then he had to pay a total of Rs 11,800. This is the reason why many people were reluctant to buy insurance policies, but now the situation is going to change.

Recently, the GST Council announced that GST will be completely removed on personal policies from September 22. So will the premium now be only Rs 10,000 instead of Rs 11,800? Because GST has become 0. This change seems to be giving direct benefit, but there are many nuances behind it, which are important to understand. If you understand its calculation, then you will know how much benefit you can actually get.

Pressure will increase on insurance companies.
Till now, insurance companies have used to take advantage of Input Tax Credit (ITC) on their expenses. Such as the agent's commission, office electricity bill, administrative cost, reinsurance cost, and outsourcing cost. Insurance companies used to get credit for the tax levied on these things.

Let's understand with an example. If a company spent Rs. 1000 on all these things for an insurance with a premium of Rs. 10,000 and 18% tax (Rs. 180) was levied on it, then they used to get input tax credit, i.e., ITC of about Rs. 180. This amount used to give them relief in their total expenses. But now, after the removal of GST, the benefit of ITC will also end. That means companies will now have to bear the burden of their expenses themselves.

What options will be available to the company?

After GST on health-life insurance becomes 0, insurance companies are left with only two options. First, they should reduce their profit and give the full 18% benefit to the customers. Or second, they should increase their base premium a little, so that the expenses can be compensated. In such a situation, be assured that every company will choose the second option.

In such a situation, what you were thinking till now that the premium of Rs 11,800 will now be reduced to only Rs 10,000, will not happen. Companies will give relief of up to 12-15 percent to the customers, but they will keep 3-5 percent profit for themselves, which can compensate for their expenses.

Competition in term insurance is tough.

Term insurance is such a product in the insurance sector where the competition is the highest. Here, even a slight price increase can pull the customers towards another company. This is the reason why people can get full benefit in this segment. In such a situation, insurance companies will hardly dare to increase the base premium.

The dilemma for the companies is that if they reduce the margin, the profit will be less, but the customers will remain. If they increase the price, then the customers can choose another company. Yes, if all the companies increase the premium, then the effect will not be seen on the customers. In such a situation, it is expected that the customers will get full benefit in term insurance, but if the companies work together, then perhaps the customers will not get full benefit here as well.

The impact on health insurance is even bigger.

Today, the need for health insurance is being felt the most. Medical expenses are increasing in double digits every year. The cost of a normal hospitalization reaches lakhs. In such a situation, if the policy becomes cheaper, more people will come forward to take coverage.

Claim settlement will also be easy.

The entire business model of insurance companies runs on risk pooling. That is, if more and more people buy the policy, the risk will be balanced. Till now, a large number of policy buyers are those who are older in age and who have a higher risk of diseases. In such cases, companies have to pay more claims.

However, if young and healthy people also buy insurance, the risk will be equal. Customers will get direct benefit from this because the pressure of claims on companies will be reduced, and they will be able to settle claims faster.

More benefits in savings products

If you take a life insurance policy that has a savings element like an endowment plan, guaranteed return plan, or ULIP, then you will get a big benefit in the long run. Earlier, when you used to invest Rs 1 lakh, a part of it used to go to GST. Now the entire amount will be invested. This means that your maturity amount and return will be more than before. Such products have the highest share in the portfolio of companies like LIC. That is, the impact of this decision will reach customers on a very large scale.

How transparent will the companies be?
The decision is in favor of the customers, but the real test will begin now. Big companies, which have strong pockets, may reduce the margin and give full benefit to the customers. But small companies can increase the premium due to increased expenses. In such a situation, transparency will be most important.

If the companies do not clearly tell how they have decided the premium, then the customers will not get the right idea of ​​​​how much real benefit they are getting. This is the reason why the regulator IRDAI will also have to keep an eye on this. So that this discount really reaches the customers and the companies do not make it a game for their profits.

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