Insurance
Tax benefits of different types of life insurance
Life insurance is a modern-day necessity. As they say, life is always unpredictable and uncertain. Hence, safeguarding your family's financial future is necessary for mental peace and stability. Investing in life insurance is thus a no-brainer. However, life insurance is not just about coverage or some added benefits that may accrue in the case of certain types of policies. Did you know you get tax advantages on your life insurance plans? Here's taking a closer look at the same.
How does Life Insurance Work?
Life insurance is a contractual arrangement between an insurer and a policyholder. Under it, the insurer guarantees the policyholder's financial security and pays a death benefit to the beneficiary upon the insured's passing. The policyholder must either pay multiple payments over time or a single premium for the life insurance policy to remain in effect.
Life insurance is typically only offered for a specific period. Therefore, if you pass away within this tenure, the life insurer will pay out a death benefit, commonly known as the sum assured. Depending on the type of life insurance plan you have, you can receive maturity benefits if you live past the term.
An online life insurance calculator can assist you in determining the coverage amount. The kind of policy, the size of the death benefit, the riders you select, and your general health and lifestyle choices all affect your life insurance premiums.
Tax Benefits Available For Life Insurance Plans
The premium you pay towards a life insurance policy will get you tax deductions, meaning that the amount paid can be subtracted from your taxable income, lowering the amount you have to pay as income tax. Using a free online life insurance premium calculator, you can calculate the payable premium for a particular policy. There are deductions available in other categories as well. Here's examining them closely:
● Section 80C Tax Deductions - As per the Income Tax Act of 1961, you can get tax deductions on your yearly life insurance premiums (up to ₹1.5 lacs annually) under Section 80C. This applies to life insurance policies that provide coverage for the life of the policyholder or their spouse and children, as per some terms and conditions. You can avail of this tax deduction irrespective of whether your child is currently single, an adult or minor, married, independent, or dependent. It is not just individuals; even HUFs (Hindu Undivided Families) can get this deduction as per Section 80C.
This will cover all the premiums you pay to the insurance company as per the regulations and approval of the IRDAI (Insurance Regulatory and Development Authority of India). Yet, if the policy began after 1st April 2021, then your annual premium should not surpass 10% of the entire sum assured amount. This is a must if you are to claim deductions under this section. The annual premium cannot surpass 20% of the total sum assured for policies issued before this date. For policies beginning after 1st April 2013, the premium should not exceed 15% of the overall sum for getting this deduction. This applies to life coverage for any policyholder with a disability as stated under Section 80U or any ailment/disease mentioned under Section 80DDB. The sum assured in this case indicates the minimum sum guaranteed for the survivor per the policy's terms and conditions. The amount does not account for premiums that will be returned as per the policy features and bonuses/incentives paid as part of the policy.
● Section 10 (10D) Tax Deductions - Your life insurance plan's maturity amount or any bonus amount will have total exemptions from taxes as per Section 10 (10D). This applies whenever the premium paid for the policy does not exceed 10% of the sum assured amount for those policies starting post 1st April 2012. For policies issued before this timeline, the premiums should not exceed 20% of the assured sum. Policies starting after 1st April 2013 and covering individuals with ailments or disabilities as per Sections 80DDB or 80U will be free from taxation if the premium amount does not exceed 15% of the sum assured.
There are zero tax exemptions on policy maturities whenever the premium surpasses 10 or 20 percent of the sum assured amount; depending on the conditions mentioned above, the amount will be fully taxed accordingly. Additionally, maturity benefits from ULIPs bought on or after 1st February 2021 will be taxed as Capital gains if the annual premiums exceed ₹2.5 lacs.
Conclusion
Life insurance guarantees financial safety for the family members and nominees of policyholders in case of their unfortunate demise within the policy period. At the same time, this makes for a good investment since there are tax benefits available as well. Therefore, you should clearly understand the entire process, from choosing a suitable insurance plan to claim submissions, premium calculations, and choosing the right coverage amount.
You can always take professional help or advice while choosing your life insurance policy. Always have a clear understanding of the tax benefits before signing on the dotted line.
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