On a routine basis, as part of my advisory work with NRI clients, I see NRIs holding overseas policies from insurers like Zurich, Metlife, LIC International etc. These may be pure term policies or investment-cum-insurance policies. As a matter of my due diligence, I ask for and review the policy wordings because as they say, the devil lies in detail.
The more I have researched on these policies over time, the more shortcomings I have observed in these policies and hence, it is my opinion that for families where after the death of husband, wife shall be returning back to India & spending the rest of her life in India, before leaping in to buy a policy from a foreign insurer, it makes sense to first extinguish all options of buying life insurance in India.
In this post, I will explain precise reasons on why I feel that way. However, please understand that this is my personal opinion and there may be many views on this topic. Critical and constructive feedback is most welcome.
Note: This post is restricted to “life” insurance only, that too issued by foreign insurers/overseas offices of Indian insurers. There are separate rules for general insurance policies and foreign currency policies issued by Indian insurers and I will take them up in separate posts.
Reason why NRIs end up buying life insurance out of India
There can be many reasons why overseas insurance policies end up finding a place in NRI portfolios. Some of the reasons can be as follows:
#1: When you as an NRI, you are also exposed to the barrage of marketing and advertising by insurers of your host country that can make you buy a policy overseas even if that is not the right one for you.
#2: There definitely are issues faced by NRIs in buying insurance in India that prompt them to buy insurance overseas. Indian insurers mandate physical presence of NRI in India for conducting medical tests, they have underwriting policies (not at all publicly disclosed) for issuing limited cover to NRI/ flat rejection to NRIs living in/travelling to countries not on their acceptable list etc.
#3: If you are an NRI and after your death, your spouse does not plan to return to India (this is found mostly where host country is say USA or Australia which allow permanent residency status to immigrants, and unlike Middle East countries where you are required to pack and go once you’re no longer employed in that country), such NRIs wish to protect the insurance corpus from foreign exchange risk & would prefer to buy the policy in USD or AUD or whichever local currency of host country (and this is not a bad idea!)
FEMA rules on overseas life insurance
Following are the two FEMA regulations governing life insurance policies purchased outside India:
The relevant extracts from the above regulations as they do apply to overseas policies are mentioned below:
- A person resident in India may buy or continue to hold a life insurance policy issued by an insurer outside India, provided that, the policy is held, under a specific or general permission of the Reserve Bank of India.
- A person resident in India may continue to hold any life insurance policy issued by an insurer outside India when such person was resident outside India.
- Provided further that where the premium due on a life insurance policy has been paid by making remittance from India, the policy holder shall repatriate to India through normal banking channels, the maturity proceeds or amount of any claim due on the policy, within a period of seven days from the receipt thereof.
- Policies issued to Indian nationals and persons of Indian origin resident abroad by overseas offices of insurers may be transferred to Indian register, together with the actuarial reserves held against the policies, on the policy holders’ return to India. Foreign currency policies in such circumstances shall be converted into rupee policies except in cases where the policy has been in force for at least 3 years prior to policy holder’s return to India and the policy holder wishes to retain and continue the foreign currency policy. Requests received for payment in foreign currency towards premia on such policies may be permitted by authorised dealers provided the policy holder undertakes to repatriate to India the maturity proceeds or any claim amounts due on the policy through normal banking channels.
What I can decipher from above are as follows:
- If I am a non-resident as per FEMA, there is no restriction for me to purchase life insurance from overseas insurer. (Issue: Regulation is silent here on overseas office of Indian insurer e.g. LIC International, or ICICI Pru offices in Dubai and Bahrain – in my view, it is also allowed as Master Direction specifically mentions about this)
- If I return back to India, I can “hold” these policies, no issues. The regulation DOES NOT allow a resident as per FEMA to buy a fresh policy from an overseas insurer. (Here, the option to buy a foreign currency policy from Indian insurer remains open but frankly I don’t think Indian insurers offer policies in foreign currency – I’m not sure on this though)
- If I had taken policy as an NRI from overseas office of Indian insurer and it has been active for > 3 years, Insurer cannot compel me to transfer it to India in rupees and I have full right to continue it out of India.
- If I had taken policy as an NRI from overseas office of Indian insurer and it has been active for < 3 years, Insurer can ask me to transfer it to India in INR: in this case, though I can make payment from resident/RFC account, I will have to bring the maturity proceeds & cannot repatriate it outside India.
Indian tax rules on claim received in India from an overseas life insurance policy
As far as the Indian tax law is concerned, Section 10(10D) of the Income Tax Act generally exempts any sum received under any life insurance policy.
Fine till now. However, there is another Section 2 (28BB) of the Act that defines the term “insurer” as an “Indian” insurance company only.
So now, the question is: what happens to a case where claim is received from a non-Indian insurance company – will it be taxable as revenue receipt or exempt u/s 10 (10D) of the Income Tax Act.
This precise question came up recently before the Income Tax Appellate Tribunal (ITAT) in the case of Taragauri T. Doshi v.Income-tax Officer, Ward 22(2)(4), Mumbai [2016] 73 taxmann.com 67 (Mumbai – Trib.).
Facts of this case and judgement were as follows:
- The assessee received a sum of US $ 9441.98 from National Bank of Abu Dhabi which is equal to Rs. 4,16,200/- towards a Life Insurance Policy that assessee’s husband had taken from American Life Insurance Company in US Dollars while working in the Middle East. The period of policy was for 21 years.
- The Assessing Officer asked the details for the said receipt & taxed the said receipt in the hands of the assessee by holding that the provisions of sec. 10(10D) of I T Act are not applicable because the policy was not taken from any Indian Life Insurance Company as per section 2(28BB) of the I T Act
- On appeal, the CIT (A) confirmed the action of the Assessing Officer on similar reasons.
- In its order, the ITAT held that It is pertinent to note that the term ‘insurer’ has not been used in section 10(10D) hence it is apparent that there was no intention of the legislature to restrict the benefit of exemption under section 10(10D) only on the insurance policy taken from Indian insurance company. Hence, the exemption can be allowed for non-Indian insurance company also.
Reasons why it does not make sense for buying overseas insurance policies
#1: Lack of clarity on tax treatment of moneys received towards these policies
Before you celebrate the favourable ITAT judgement given above, please mind a couple of things about tax treatment of overseas policies in India:
- The ITD can clearly try to tax these receipts going forward also, as they’ve done in this case, which can mean a huge tax liability UNLESS your spouse is prepared to hire a CA & fight the case
- The judgement is given at an ITAT level, which can be easily superseded tomorrow by a High Court or the Supreme Court. Also, there is a chance that the Government amend Section 10 (10D) to plug this revenue loophole & make it explicit that only payouts from Indian insurers qualify for exemption.
The point I am trying to make is that though we have a favourable ITAT decision, still it is not correct to lose your guard and the tables can turn very quickly. The law and judicial precedent at the time when YOUR claim is paid out will be what matters, and hence there is a definite residual risk that Indian tax authorities make an overreach and try to tax the proceeds of overseas insurance policy at that point.
#2: These policies are governed by host country’s laws and not Indian laws:
When I was reading policy wordings of Zurich policy for one of my UAE clients, I was surprised to note three things:
- Zurich is incorporated in the Isle of Man.
- It will pay the claim only where its office is located (to the best of my knowledge, it has offices in UAE, Singapore, Hong Kong etc. but NOT in India)
- Policy will be governed and interpreted completely in accordance with the local laws of the host country.
Now, assume you are a resident of UAE. From whatever little I know of UAE, it applies Sharia law in case of a succession and in most cases, courts in UAE ignore all existing nominations/wills etc. As per the Sharia law, for example, wife is allowed only 1/8th share in the property and on death, bank accounts are freezed until court orders are obtained. Further, I have no idea on the grievance redressal mechanism in UAE – my only guess is that it is not as tightly regulated as it is in India.
So, I don’t know about you, but in matters of insurance, where I am not there to pursue my case, I would want to play it safe and ensure that I buy a policy in a country where the laws are much better and fair and my spouse does not have to fight from pillar to post for getting the money.
#3: Possible exchange rate risk
Yes, the way regulation is worded means that for an overseas policy < 3 years old on an NRI’s return to India, insurer has the right to convert it in INR and deny repatriability outside India. This creates an exchange risk for your spouse if she plans to settle out of India.
#3: Some of these policies can be highly toxic:
Like we have toxic products like traditional and ULIP products in India, even foreign insurers have these toxic savings cum investment plans and so do the overseas offices of insurers like LIC do. Forget about the FEMA and tax implications, your first duty is to not fall in the trap of these products. Never combine insurance and investment; it is a recipe for disaster.
My question is that when you can purchase low cost Indian mutual funds and have avenues like NRE FDs, they why fall for such products? For example, I saw the product T&C of “Vista” plan from Zurich and it was so full of charges etc. – can you imagine, the policy charges a flat USD for a payment by credit card?
When buying overseas life policies may make sense
In my view, buying a pure term life insurance policy outside India makes sense only in two situations:
- Where your spouse will not return back to India, you have zeroed on a country & are fairly comfortable with local laws of your host country AND you do not want to take any currency risk on insurance corpus.
- If above does not apply to you but due to whatever reason, you’re not getting the policy issued in India
Before buying overseas policy, ask yourself these questions
I urge you to ask yourself following questions before buying overseas policies:
- Is my wife going to spend rest of her life here?
- If no, does it make sense to buy a policy in USD?
- Is this a right product (i.e. should be pure term, not ULIP/traditional policies etc.)
- Have I tried getting insurance in India? Can I do it on my next visit to India?
- Have I compared premium for a given Sum Assured (SA) between overseas vs. an Indian policy?
- Have I got a complete hold on the claims settlement process of insurance company? What is the course of action & rights for spouse in case insurer denies a claim?
Precautions to follow while buying overseas life insurance policies
While buying an overseas policy, you must follow the precautions as outlined below:
- Do not buy ULIP/traditional/ULIP policies – stick to pure term life insurance only without any return of premium
- Speaking of currency, first preference should be to buy the policy in the currency of the country where your spouse will live after your death. Else, buying in USD is also a very comforting option.
- Read, consult, and get a complete hold of the claims settlement process of insurer, grievance redressal system, succession rules in the host country. If possible, engage a CPA/attorney in the host country who is well versed with these aspects.
- Nominate your spouse in the policy. Ensure that the name is spelled correct.
- Check the claims settlement process of the policy. Especially download the claims form from the website to see which actual documents will be required to be produced in event of claim. Check: will the insurer accept an Indian death certificate, just in case etc.
- Create your will as per laws of the host country & do not forget to mention the policy details in the will.
- If you have bought policy from Indian insurer like LIC International, even if you relocate to India only for a short period say 2-3 years, DO NOT transfer the policy to Indian register because as mentioned above, you will lose right to repatriate the claim money. FEMA allows you to continue your overseas policy and to pay premium from your overseas bank account or an RFC account in India. Do not pay from an Indian resident account – this will be a violation of FEMA.
- If your spouse plans to repatriate claim to India, she must not collect it directly in the Indian bank account. Instead, she should collect it first in her overseas bank account & then remit to the Indian account. Spouse should also preserve the claim settlement advice to explain source of funds to Indian tax authorities, if required.