In case you wish to have some financial backing for your expenses in the future, insurance plans are a preferred bet. Life insurance policies are becoming popular ways to ensure your family’s financial costs are covered should your untimely demise occur. One of the preferred way to get cover for your life is to consider signing up for an endowment policy. An endowment life insurance plan is a life insurance plan which helps the policyholder save regularly over a specific period of time so that he/she is able to get a lump sum amount on the policy maturity in case he/she survives the policy term.
Hence, this represents a kind of term life insurance, but with a savings scheme attached. In case of your unfortunate demise before the policy reaches its maturity date, your nominee(s) will get a payout as a death benefit. If you survive the term of the endowment plan, you get a maturity payout as per policy terms & conditions.
A Lowdown on the Tax Treatment of an Endowment Policy
In many cases, policyholders might not wish to continue with a life insurance plan. This may be for various reasons. Policyholders may fall short of funds, or there may be more suitable alternatives in the market. Whatever the reason for surrender of a policy may be, if a policyholder wishes to give up an endowment policy, it is crucial to be aware of the implications of tax. On amounts you receive as a result of the surrendering.
You can get two kinds of endowment plans. One is available with a profit, and the other is available without a profit. The plan that involves “a profit”, gives policyholders bonuses, if declared by the company. These are given as a result of your funds being invested in a company and the company making profits. The plans that are available “without a profit” offer you returns that are guaranteed, but no additional bonuses as such.
If you are making any kind of profit out of an endowment plan, there would be a tax component attached. Before you take the step to surrender an endowment plan, you should know about any tax liability you may have to face.
Taxability
If you have a conventional insurance policy, you are not liable to pay any tax on the surrender value of this kind of policy. This is provided the premiums of the first two years of the policy tenure have been paid in total. Furthermore, the time of issue of the policy matters in relation to taxability. If your conventional life insurance plan was issued before 31 March 2003, the amounts you accrue would be free from any tax liability. If the policy was issued between the period 1 April 2003 and 31 March 2012, then the surrender value would not be liable for any tax provided the death sum assured is equal to or more than five times the amount of the premium paid annually. For any policies issued on 1 April 2012, or after that date, the surrender value would not incur any tax, provided the death sum assured is equal to or more than ten times the premium paid annually. Such tax regulations are applicable to any endowment policy too.
If a sum that is received from a surrendered policy is attained on account of the following, the policyholder is exempt from tax:
- If the policy is issued after 1 April 2003 but on or before 31 March 2012 and the payable premium for any year in the tenure of the policy is equal to or less than 10% of the death sum assured.
- If the policy is issued after 1 April 2012 and the payable premium for any year in the tenure of the policy is equal to or less than 20% of the death sum assured.
Conclusion
An endowment plan is a sensible way to save money while you assure financial protection for your family and yourself. There are many insurance plans to choose from, so you can find one that fits your needs. You may take aid of a life insurance calculator for further assistance. This is a preferred way to allocate your wealth, while you get financial protection for your loved ones in your absence. You can avail certain tax advantages too as per provisions stated in Income Tax Act, 1961.
BJAZ-WEB-EC-01420/22
