Term Insurance is one of the most affordable forms of life insurance available in the market. Term Insurance plan comes with add-ons like coverage against critical illness, coverage for the nominee and more. One such example is Term Insurance with a Return of Premium; in this, if the insured person survives the length of the policy, a term plan with a Return of Premium feature assures that the insured receives survival benefits at the conclusion of the policy tenure.
No one can foresee the future, and thus it’s essential to have term insurance, especially if you are the only breadwinner for your family. However, even if your spouse is employed, it is still a good idea to have term insurance as it will protect your family financially after your demise. Many term insurance products are available these days that cater to different needs.
When buying a term insurance plan, it is important to pay heed to the tax implications that come with it as it helps you to make necessary financial planning.
We will also cover term insurance tax benefits, both in the form of deductions and exemptions. The post explains about tax implications that an insured person must consider when buying a term insurance policy.
Deduction under Section 80C
Deductions under Section 80C of the Income Tax Act of 1961 allow taxpayers to reduce tax liability by up to INR 1.5 lakhs, under the provisions defined, during every financial year.
Under Section 80C of the Income Tax Act of 1961, an insured person can claim deductions against premiums paid for term insurance in a financial year. Both individuals and Hindu Undivided Families (HUFs) can claim this deduction.
In case of term insurance policies issued on or before 31st March 2012, the deduction is capped at 20% of the capital sum assured. For term insurance policies issued post that, the tax deduction is limited to 10% on the assured sum. In the case of disability, this limit is 15% of the assured sum.
Benefit under Section 10(10D)
The amount provided by a term insurance policy as a death benefit is fully exempt from tax under section 10(10D) of the Income Tax Act of 1961. So, along with offering financial protection, a term insurance plan allows the nominee to receive the entire sum assured without any tax liability.
Benefits under Section 80D
If your term insurance plan has health riders like critical illness benefit rider, accidental death benefit rider, or waiver of premium benefit rider, then the premium you pay towards such riders/add-ons is eligible for deduction of tax under Section 80D of the Income Tax Act, 1961. The deduction limits for this tax benefit are clearly stated in the term insurance policy document, which is capped at INR 25,000 for people below 60 years of age, and at INR 50,000 for people who are 60 years of age or above.
How Do I Choose an appropriate Term Insurance Plan?
When buying a term insurance plan, making a sensible decision is crucial as it offers financial security to your dependents when you are not around to take care of them. Here are the aspects to keep in mind before buying a term insurance plan: –
- Sum assured: Term insurance provides financial security, and to make sure your dependents get adequate coverage in the case of an eventuality, you need to decide the sum assured carefully. Always take the future financial needs of your dependents into consideration when doing so.
- Consider your current and forthcoming liabilities: When selecting term insurance, you must consider all your liabilities vis-à-vis your income. In the case of an exigency, repayment of your loans shouldn’t become a burden for your loved ones.
- Evaluate your lifestyle: It is crucial to evaluate your requirements as per your lifestyle. This refers to your general way of living, which includes your spending patterns. You can better protect your loved ones if you know their needs and how they live. With the right term insurance cover,their standard of living wont be compromised.
- Add riders to the plan: Based on your requirements, you can enhance the benefits offered by your term insurance plan. You can do so by adding riders to the plan by paying an extra nominal premium. Some of the standard riders available with term insurance plans provide coverage against critical illness, payout on accidental death, waiver on premium benefit, and so on.
- Check the claim settlement ratio: It denotes the percentage of claims successfully settled by the insurance company. So, when you choose a life insurance company, make sure their settlement ratio is transparently stated; it shows the intent and capacity of the insurance company to deliver on its promise of providing financial support when required.
While many people buy term insurance to avail term insurance tax benefits, its primary purpose is to financially secure the future of your loved ones. Choose a term insurance that ensures that the said purpose is met.