Removal Of Tax Benefits Hits Life Insurance Sales, Says Deepak Parekh

The rollback of tax incentives has cooled demand for life insurance in India, Deepak Parekh, former chairman of HDFC said. During his interaction with the media on the sidelines of the second edition of the CII BFSI Summit on May 6, Parekh said that previously life insurance saw strong growth largely because the premiums qualified for tax deductions.

With those tax advantages pared back, many bundled savings-and-insurance plans no longer deliver the same take-home value, prompting customers to delay purchases, switch to purer protection cover, or walk away altogether. The impact shows up in falling new business, softer persistency, and increased pressure on distribution margins, complicating insurers’ efforts to deepen protection across smaller towns and lower-income groups.

Tax-Driven Demand Has Eroded

For years, tax breaks were a decisive reason households bought certain life policies. Products that combined an investment component with life cover benefited from preferential tax treatment and were pitched to customers as a dual-purpose solution: savings plus protection. As those tax benefits have been curtailed or removed, the after-tax attractiveness of such products has diminished. People who bought policies chiefly for tax breaks are increasingly questioning whether they offer genuine value. Insurers are reporting lower retail sales and a rise in lapses and postponed renewals as customers pause to consider alternatives, according to a recent report by ETLegalWorld.com.

Distribution And Product Economics Under Pressure

The change has immediate consequences for distribution. Agents, brokers, and bancassurance partners that relied on tax-driven sales are now facing tougher client conversations and squeezed commissions; bank channels that sold on tax benefits have seen conversions fall, and insurers must now revisit pricing, commission structures, and product design to highlight protection while safeguarding margins and regulatory capital. That adjustment period is likely to blunt growth until market participants align on transparent, customer-centric offerings.

What Consumers And Policymakers Should Consider

Consumers should separate the protection element from the investment element when evaluating life insurance. Pure term cover often provides a much higher level of life protection for a fraction of the cost of savings-linked plans, making it worth considering for core protection needs. For long-term goals such as retirement or building wealth, standalone pension plans or investment products often deliver better outcomes than bundled insurance-savings policies once tax perks are removed. Policymakers should bear in mind that tax-rule changes can materially alter consumer behaviour, and any reform must be clearly designed and communicated to avoid unintentionally reducing access to protection for vulnerable households.

How The Industry Can Adapt

Insurers should simplify product line-ups, prioritise pure protection plans and be clearer about charges and likely returns, while boosting adviser-led financial education so customers can weigh protection, savings and tax trade-offs.

Digital distribution and modular product structures can lower costs and widen reach, especially in underpenetrated regions. Over the medium term, the sector’s ability to reposition life insurance as primarily a risk-management tool rather than a tax-efficient savings vehicle will determine whether sales recover and whether households regain access to affordable cover.

FAQs

Why are life insurance sales falling after the rollback of tax incentives?

Many buyers previously purchased savings-linked policies for tax benefits; with those reduced, the after-tax appeal falls, so customers delay or drop purchases.

Should I switch from a savings-linked plan to a pure term policy?

If your main goal is protection, a pure term plan usually offers much higher cover for a lower premium; evaluate savings needs separately with dedicated investment or pension products.

How can insurers respond to restore sales and protect margins?

Insurers can simplify products, prioritise pure protection, improve adviser-led education, revise commissions, and use digital distribution to lower costs and expand reach.