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Insurance and Tax Planning

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People have been buying life insurance over the years not just for the insurance part of the equation – it is the Tax Benefit as well as investment insurance that catches people’s imagination. Income tax is an expense that you would want to reduce. When you file income tax return, it would help to have options that work towards the tax saving potential of your investments. And life insurance becomes just the right set of tools to save tax.

Life Insurance and Tax Benefit:

It is a known fact that many people take up life insurance to save tax. However, let’s face it – that is not the primary selling point of life insurance. In fact, life insurance should not even be considered primarily from the perspective of investment insurance, since the very purpose of life insurance is to insure against risks that might put your family and Dependants in trouble. Life insurance provides financial security to people who look to secure the future of their family and loved ones.

The tax benefit as well as the investment potential associated with life insurance is essentially incidental. However, the tax benefit that comes with life insurance is significant enough to make material difference to your expenses associated with income tax return.

Tax Saving in Life Insurance:

According to legislation under Section 80C, a sum of Rs. 100,000 is eligible to be exempt from taxable income when it is invested towards premiums in life insurance. And the Section provides for investment in other options as well, as in the case of employee provident fund, public provident fund, equity linked mutual funds, and in National Savings Certificates.

One of the key factors to keep in mind when buying life insurance is tax. Although insurance should not be bought to save tax, the tax savings provided under various Sections of the Indian Income Tax Act, make buying insurance “cheaper” as well as an efficient investment for long Term savings.

With life insurance, any Premium paid by the individual towards insurance policies taken in his or her own name, in the name of their spouses, or in the names of any of their children, would be tools for tax saving, as long as the premium paid towards insurance does not exceed 20% of the sum assured.

It may be noted that there are legislative changes that propose a decrease in the limit of exemption to save tax from insurance premium paid to 10% or less of the sum assured. In effect, this would allow for higher amounts of sum Assured on premium paid, which should be beneficial to the investor. It would help to keep a tab on changes in legislation with regard to tax plan and its impact on tax saving.

Tax plan and Maturity benefits / death claims:

It is not just the premiums towards life insurance that are exempted from income tax. Section 10(10D) of the Income Tax Act postulates that payments made to the Insured by the Insurer upon maturity of the insurance Policy or in the form of payments on death claims would be exempted from income tax, thus proving the worth of insurance as instruments to save tax. However, single premium policies may not be eligible for exemption under the tax plan.

Buying Insurance at an Early Age is Beneficial in More Ways Than One.

1.You are Healthier –

For buying life insurance, you need to fill up a medical questioner about your health, family health history and any accidents or illnesses that you may have had in past. You also have to undergo a medical examination. Generally termed as medical underwriting, it is an important factor in determining your life insurance premium. This is because insurance is based on risk. Young in age, you are healthier, medical Risk to life is considerably low. This allows you better chances of reduced premiums.

2.Premium Grows With Age –

As you grow, risk to life grows, and there are more chances of acquiring lifestyle related illnesses. If you have a family history of certain diseases, there are more chances of you getting those at a later age. Keeping that in mind, even for a healthy person, the Premium of insurance is set higher in upper age brackets by the insurance company. Insurance companies take into account this risk while calculating the premium.

3.Debts and Liabilities are More –

At a young age, when you are just starting off in life and career, you have financial burden of setting up your home; you have just bought a new house you are expecting added expenditure for the child’s education. Debts and liabilities are maximum at this stage. Although buying life insurance adds to this financial burden, it protects you and your family from future discomforts in case of an eventuality.

4.Unexpectedness of Life –

You are young, you don’t have any serious health risks and you can take good care of your liabilities but in case of sudden unexpected death, all your debts and liabilities are passed on to your dependents who are least prepared to handle them. With a life insurance policy in place, you will have peace of mind for responsibilities well taken care of.

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buying life insurance early in life, you are securing the life of your dependents. Moreover when you buy life cover early, you can avail maximum Age Limit available for the Coverage at much lower rates. Buying life insurance early will cover your life for the most crucial part. Though when the policy Term expires, buying new policy may become very expensive. At the same time, you may have met all your requirements by then and not need that much cover.

The only apparent drawback for taking early insurance is the financial pressure that you may feel along with other pressing financial requirement. Consider this as important as other investments and requirements as this the only thing that is going to protect your family in your absence.