Investments made in life insurance in the form of paying premiums qualify for deduction under Section 80C of the Income Tax Act.
• The premiums paid qualify for tax benefits if the premium paid is equal to or less than 20% of the sum assured (SA). For example if the premium paid is INR 20,000 then the sum assured (SA) should be at least INR 1,00,000 or more than INR 1,00,000 for the investor to avail tax benefits.
In other words it simply means that the sum assured (SA) should be at least equal to 5 times the premium paid or more than 5 times the premium paid.
• To avail tax benefits there is a lock-in period of 3 years.
• Death benefit or maturity benefits received from an insurance company are exempt from tax.
• Life insurance provides the triple benefit of life cover, tax benefits and returns on investment.
• Premium paid towards health insurance qualifies for deduction from taxable income under Section 80D of the Income Tax Act. This deduction is for INR 15000 p.a. for individuals and INR 20,000 p.a. for senior citizens. This deduction is over and above the available deduction of INR 1,00,000 available under Section 80C of the Income Tax Act.
• Many people invest in life insurance only for tax savings beating the primary purpose of insurance of providing cover against uncertainties and risks in life.
• How much insurance a person should buy can be determined using the Human Life Value concept
• There are different types of policies available in the market: Term Plans, Endowment Plans, Unit Linked Insurance Plans.
• Term Plans provide benefit (sum assured amount) only on death of the life insured. If the insured survives the tenure of the policy, he does not get anything. Term policies are the cheapest insurance policies cost wise, available in the market.
• Endowment plans have the maturity benefit element apart from the death benefit. If the life insured dies during the term of the policy the nominee gets the death benefit. If the life insured survives the tenure of the policy, he gets the maturity benefit amount.
• Unit Linked Insurance Plans (ULIPs) offer the combination of investment and insurance. The investor has the choice to decide where he wants his money to be invested (debt/equity/combination of both) and in what proportion. If the life insured dies during the tenure of the policy then the death benefit or the fund value is paid, whichever is higher. If the life insured survives the tenure of the policy then the fund value is paid. Some companies pay both the fund value as well as the death benefit on the death of the life insured.
• Buying insurance is not a one time activity. An individual, with the help of his financial planner, should keep on reviewing the insurance cover from time to time to make sure that he has adequate insurance. The needs and responsibilities of a person keep increasing over a period of time; this necessitates increase in life insurance cover.
