What Is Life Insurance
By investing in life insurance plans, policyholders can secure their future, as well as the future of their family. This insurance cover is important as it provides support to the family members of the policyholder upon their demise.Furthermore, the life insurance premiums are tax deductible under Section 80C of the Income Tax Act 1961 (subject to provisions stated therein), and policyholders can select the plan that best suits their needs from a wide range of insurance plans available in the market.
While investing in any plan, the primary objective is to accomplish short-term and long-term goals. Furthermore, it is also imperative for policyholders to compare different policies, assess their risk-appetite, and their ability to pay premium.
Types of Life Insurance Policies:
Depending on the term, possibility of investment and maturity benefits, life insurance policies can be divided into the following types of plans.
• Term Insurance Plans: Term life insurance or pure life insurance guarantees payment of a defined benefit in case of death within a specified term. This type of term insurance policy not only offers guaranteed death benefit but also return of premium option. Unlike other insurance policies, pure term life insurance plan has no savings option, and is only used to provide insurance to life assured against the loss of life. Considering there is no saving element, the term life insurance premiums are generally low as compared to premiums of other life insurance plans. The term premiums, set by the insurer, depends on various factors, such as the individual’s age, health and life expectancy. If the life assured passes away during the specified policy term, the nominee will be paid sum assured by the insurer. However, there will be no payment if the policy matures before the death of the policyholder.
• Unit-Linked Insurance Plan (ULIP): One of the preferred tax saving investment options is the Unit-Linked Insurance Plan (ULIP), which offers policyholders insurance along with the option to invest in equity or debt funds (or both). Policyholders can choose the type of investment based on their long-term goals and risk appetite, while a charge is deducted for life insurance cover provided. When a policyholder invests in a ULIP plan, the insurance company invests the premium in equity and/or debt funds of the policyholder’s choice, and a mortality charge is deducted for the life cover provided. ULIPs are one of the preferred tax saving investment options as they also allow the policyholders to switch their portfolio between equity and debt funds. ULIPs have a lock-in period of five years, which was increased from three years in 2010 by the Insurance Regulatory and Development Authority of India (IRDAI). For investors to truly reap the benefits of ULIPs, it is advised that they hold it for the entire duration of the policy term.
• Traditional Endowment Plan: In a traditional endowment plan, policyholders are offered insurance cover, along with the option to save a certain amount over a specified period. Upon the maturity of the policy term, the policyholder gets the lump sum amount if they are alive, and if the policyholder passes away during the policy period, the beneficiaries receive the life cover amount. As such, taxpayers can opt for endowment plans if they want to receive a lump sum amount after a certain period. Furthermore, this type of plan is subdivided into two types - with profit and without profit. Furthermore, endowment plans are not high risk, and are ideal for goal-based savings. This plan enables individuals to build a corpus over a long period, and investors can receive the lump sum amount after the maturity of the policy period.
• Money Back Plan: One can describe money back insurance plan as a pure endowment plan, with the added benefit of regular liquidity. In a money back insurance plan, the policyholder or the beneficiaries receive multiple survival benefits, which are spaced out or staggered evenly during the course of the policy period, thus ensuring periodic pay-outs. The nominees receive death benefit if the life assured passes away.
• Retirement Plan: As the name suggests, retirement plans are insurance products which provide policyholders with financial security after their retirement. Policyholders can also opt for monthly pension benefits with the proceeds from the retirement plans, which can be done by purchasing annuity plans. Taxpayers can invest the amount they’ve earned and saved over the years by creating a fund, and reap the benefits when they have accumulated their corpus in the long run. Policyholders can choose to receive payments systematically i.e. yearly, quarterly or monthly subject to features available in the product.
• Whole Life Plan: A whole life insurance policy, like its name suggests, is a life-long insurance protection. Most of the insurers provide protection up to 99 years of age. Apart from having an insurance benefit, this policy also has an investment benefit. It offers guaranteed death benefit in the event of the death of the policy holder during the policy period. If the policyholder ends up living the term of the policy, he is entitled to a maturity benefit as per the sum assured he has selected at the time of inception. Annuity plans are further divided into fixed, variable and indexed annuity plans. While fixed annuities pay guaranteed returns, their annual returns might be on the lower side. Variable annuity plans can offer higher returns, but also come with greater risks. Indexed annuity plans offer policyholders guaranteed minimum pay-outs. However, a portion of their returns would be dependent on the performance of the market index.
Three Ways In Which Insurance Plans Provide Tax Benefits
1. Tax Deduction on Premiums: Under Section 80C of the Income Tax Act 1961, taxpayers can claim deduction up to Rs. 1.5 lakhs on the premium paid, either on their own life, or the life of their spouse or children. Furthermore, the tax exemption is restricted up to 10 percent of the sum assured. However, if the policyholder either stops paying premium or terminates policy before the lock-in period ends in case of ULIPs, the exemption will not be available.
2. Tax Deduction on Claims: Under Section 10(10D) of the Income Tax Act 1961, tax deductions are offered on claims (death and maturity benefit) subject to satisfaction of conditions mentioned therein. All types of accrued bonuses against life insurance policies are included, and there is no upper cap on the claim. The tax deduction is only available if the premium payment is not greater than 10 percent of the sum assured.
3. Tax Benefit Under Section 80D: Under Section 80D of the Income Tax Act, the premium paid on medical insurance offers tax benefits, and it is over and above the deductions claimed under Sections 80C/CCC/CCD. If a policyholder has insured themselves, or their spouse or children, they can claim deductions of up to Rs. 25,000, while an additional deduction of Rs. 25,000 is also available if their parents are also insured, and are below 60 years of age. If the parents are above 60, an additional deduction of Rs. 25,000/- 50,000 is available. The maximum deduction that is available is Rs. 1 lakh if both the taxpayer and their parents, for whom the medical covers were taken are above 60 years old. Furthermore, under Section 80DD, any amount spent towards the treatment or maintenance of a person with specified disability is treated as a deduction, but is limited to Rs. 75,000 per year.
Conclusion
Insurance policies are crucial for families, as they offer financial assistance during emergencies. Insurance covers enable policyholders to secure their future, and the future of their spouses and children. Life insurance policies such as ULIPs are also considered to be one of the preferred tax saving investments in India, as they serve as an investment tool to create wealth, while offering insurance coverage to the policyholder.
It is imperative for taxpayers to identify their short-term and long-term goals before choosing an insurance plan. Not only does it ensure a sound financial future, but it also ensures that the futures of those who are dependent on the policyholder are secured. Furthermore, investors can also take advantage of the tax benefits on insurance, thus helping them save on tax payable.
