Are you Aware of the Tax Benefits of Life Insurance?

A life insurance policy basically provides financial and monetary protection to the dependants of the insured after his or her death. A life insurance policy is a legal contract between the insurer or the insurance company and the policyholder. It ensures a guaranteed payment to the beneficiaries of the insurer upon his/her death. Various life insurance channels are present like term life, variable universal life, whole life and universal life.

Life insurance plays certain important roles. Life insurance plays an investment role as the premium paid comes back to the individual with added returns. Life insurance also acts a risk cover and provides financial protection against unforeseen circumstances. Insurance provides a sense of security to the insured which no other investment can provide. The most important role of insurance which is often overlooked by the policyholders. The Government of India provides tax benefits on life insurance products which facilitates the flow of funds to other productive assets. The insured is entitled to tax benefits under Section 80C and Section 10 (10D) under the Income Tax Act of India.

Life insurance is an important tax saving tool which can help save immediate tax and also help plan for long term goals in a tax effective manner. Under the Income tax act of India, tax deduction can be claimed for premium paid for the life insurance policies under section 80C. Important points to note are:

Amount of benefit allowed: The maximum benefit that can be claimed is rupees one lakh fifty thousand from the taxable income from investments made in specific categories, life insurance being one of them. An amount of up to Rs. 150000 can be claimed if no other investments are being made under this category.

Who can benefit: This deduction can be claimed by individuals and Hindu Undivided Families (HUF). The individual can benefit if the life insurance has been bought for himself or herself or for his or her spouse. Paying premium on life insurance for anyone other than the above is not tax deductible.

Premium vs Coverage: The premium is deducible only if it is within the coverage limit. The coverage should not be more than 20% of the sum assured. If the amount paid as premium is more than the coverage limit, the amount over and above the 20% of sum assured is not tax deductible. This is valid for policies issued before March 31, 2012. In case of policies issued on or after April 1, 2012 tax deductions are allowed for premiums paid up to 10% of the sum assured.

Policy holding period: In case benefit has been claimed under this section and the policy is terminated within 2 years from the start of the policy, the benefit is reversed. This applies to all life insurance policies except ULIP’s. In case of a ULIP, if the policy is terminated within 5 years from the start of the policy, the benefit is reversed.

In case of death claims and maturity benefits, the tax exemption can be claimed under section 10 (10D). In order to qualify for deduction under this section, the amount should have been the maturity benefit, survival benefit, death benefit, sum allocated by way of bonus or surrender value. The amount of deduction allowed is 20% of the total policy sum assured in case of policies issued after April 1, 2013. For policies issued after April 1, 2012 the amount eligible for tax deduction is 10% of the total policy sum. There is no upper cap on the amount of deduction claimed under this section. The plan for which deduction is claimed should be for the protection of life of a person with severe disability as specified under section 80U or an ailment listed under section 80DDB of the Income tax act, 1961.

Term Insurance Plans for the Best Coverage and Tax Saving

There are various life insurance plans available in the market. Term insurance plans, which are availed for a certain period of time offer great benefits to the insured. Kotak life insurance offers various plans that are aimed at providing security and risk cover to the insured. These include protection plans, Savings and Investment plans, Retirement plans, Child plans etc. One such plan offered by Kotak Life Insurance is the e-term plan. It is an affordable plan that offers financial security to the family of the insured. Kotak life insurance e-term plan is a pure protection term insurance plan.Kotak e-term plan offers the option of enhancing the coverage to provide a risk cover against accidental death, disability etc. The key features of the plan include protection at a nominal cost, availability of multiple plan options, three easy pay-out options and an option to step down. The benefits include affordable premium which is as low as Rs. 9 per day, availability of add on benefits and tax savings under section 80C and Section 10 (10D) of Income Tax Act, 1961.

Amongst all the tax savings options available, a term plan is often considered as the most effective option. Not only does it offer financial security to the family of the insured, but it helps in effectively reducing the tax liability of the individual. Choosing and purchasing a term plan that is suitable to the individual is an important task. Kotak life insurance, a trusted provider of life insurance policies provides a broad range of term plans which offer triple benefits of tax savings, risk cover and tax free returns.

Thus, with a thorough understanding of life insurance policies, individuals can plan out their investments and ensure correct decisions. Life insurance policies are important and effective tools of investment and tax savings. With better planning and consultation of experts, individuals can make the most out of their investments, avail tax benefits and also achieve their long term financial objectives.