[Opinion] Valuation of Life Insurance Service under GST

Annapurna Dubey – [2023] 149 taxmann.com 165 (Article)

I. Understanding the Business of Life Insurance

The contract of insurance is one where the risk of one party is transferred to the other. The insurer is the one who makes good the loss suffered by the insured on happening of an uncertain event. Thus, the most commonly adopted form of risk transfer is insurance.
Life insurance particularly is on the person. It includes untimely death, outliving income, incapacity or disease/injury.

The insurance Act, 1938, defines life insurance business as –

“the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any contingency dependent on human life, and any contract which is subject to payment of premiums for a term dependent on human life and shall be deemed to include—

(a) the granting of disability and double or triple indemnity accident benefits, if so provided in the contract of insurance,

(b) the granting of annuities upon human life; and

(c) the granting of superannuation allowances and 1 [benefit payable out of any fund] applicable solely to the relief and maintenance of persons engaged or who have been engaged in any particular profession, trade or employment or of the dependents of such persons;]

[Explanation. — For the removal of doubts, it is hereby declared that “life insurance business” shall include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment and a component of insurance issued by an insurer]”

Thus, life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay beneficiary/insured a sum of money upon the death of the insured person or happening of the event covered under the contract.

II. Types of Life Insurance Products

Life Insurance Companies offer many types of insurance products which are broadly categorised as:

1. Term Plan: In respect of Term plan, the insurer will pay out the sum assured only on the death of the policyholder within the policy term. In the event that the policyholder outlives the policy term, the insurer will not pay anything to the policy holder. These products generally have no saving or investment element & the entire premium is towards risk cover.

2. Endowment plan: In the case of endowment policy, the insurer will pay out the sum assured under the policy along with all benefits that have accrued till date upon policyholder outliving the term under the policy or on death of the policy holder whichever is earlier. Thus, the premium in these kinds of plans include death cover & savings portion. It is a bundled policy where insurer does not disclose the various internal charges, risk cover, loading for expenses, interest, etc. Even the investments made under the plan are not disclosed to the policyholder as these are composite products where both risk & savings are embedded.

3. Unit linked insurance plan (ULIP scheme): In the case of Unit Linked Insurance Plans (ULIP) the policy holder invest part of their premium into investments in different types of funds and a part of the premium goes towards providing life cover. On death, the policyholder will get the fund value or the sum assured on death whichever is higher. On maturity, the total fund value as on that date is paid out. In these types of plans, the insurer deducts his various expenses for administration, investment, fund switch, etc in the form of charges from the policyholder and such charges are completely disclosed to the policyholder.

4. Annuity/pension plan: The insured pays the premium in lump sum or in instalments over a certain period of time. The insured will receive back a specific sum periodically from specified date onwards, either for life or for a fixed number of years. Such schemes are in the nature of pension/annuity plans.

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