One of the most important components of a good blueprint defining your financial goals is the life insurance product. When the financial protection of your family and the creation of wealth in the long term is paramount, it is life insurance that you think of first. The choice is wise for the multifarious features that are on offer from the 24 insurance companies, including Life Insurance, operating in India. It is a common notion that you buy a life insurance product for protection against life risk and not investment. There is a slight dichotomy in this. Most life insurance plans not only cover you for life risk, but also extend savings as well as investment benefits to help you create wealth in the long run.
Life Insurance as an investment:
The strategy for investment in life insurance is two pronged – one to protect your family financially on your demise during the currency of the policy and two, should you outlive the policy term, gain maturity benefit which is the sum assured plus the bonus and incentives. The important aspect we tend to ignore is the tax benefits we enjoy through investments in life insurance. Not only is your premium paid during a financial year exempt for a maximum of Rs.1.5 lakhs, your death and maturity benefit receipt is also tax-free. Every penny saved is also your earning, which if invested ultimately augments your wealth. How this works requires you to gain knowledge about the products first, so that you are able to exercise due prudence in your choice of products when you buy.
Life Insurance and its Types:
A life insurance policy is a contract with you that covers your life risk and promises to pay a death benefit to your nominee in the event of your demise within the term, and on survival you are paid maturity benefit comprising of the sum assured plus the bonuses. All this is incumbent on your payment of premium fixed on the basis of the chosen plan, term, your age and health. Though there are innumerable variations, the plans can broadly be divided into three basic categories. They are:
- Term Plan: It is the simplest form of life insurance where the death benefit is paid to your nominee on your demise during the currency of the plan. Since there is no payout on your survival, you are offered a high sum assured at a very affordable premium, making it one of the cheapest life insurance products.
- Endowment Plan: It is a combination of life cover and savings. The death benefit comprises of at least the sum assured whereas the maturity benefit, the sum assured plus the bonuses. Therefore, it is a tool to aid in your wealth creation.
- ULIP: This is a unique product called Unit Linked Insurance Plan, where you enjoy the features of investment along with cover for life risk. A portion of your premium is invested in market instruments in order to get higher yields. Since a wealth builder requires time, this is ideal as a long term investment. To reinforce this principle, ULIPs are locked in for 5 years.
The Quantum of Life Insurance Needed
A critical issue is the amount of cover that is ideal for you. There are many factors that influence your coverage. With the purpose of life insurance being a protection to your family on your demise and to fulfill other life milestones including your children’s education and wedding in mind, the following factors become crucial.
- The number of your dependents.
- Your income resources and expenses.
- The number of liabilities.
- The lifestyle you propose for your family.
- Child’s education.
- Your age and medical history.
- Investment objectives.
Life Insurance and Income Tax
Payment of Income tax is the duty of all earning Indian citizens within the shores of India. The revenue earned from Income Tax allows the government to fund various infrastructure projects and extend social welfare measures. To comprehend this fully, you need to know the provisions of Income Tax in India. The basic income tax structure for individuals in India is illustrated below. This slab is applicable to persons below 60 years of age
- Income from Rs.0 to Rs.2.5 lakhs – Nil
- Income from Rs.2.5 lakhs to Rs.5 lakhs – 5%
- Income from Rs.5 lakhs to Rs.10 lakhs – 20%
- Income from Rs.10 lakhs and above – 30%
- Health and Education Cess – 4% of IT plus surcharge
- Surcharge for Rs.50 lakhs to Rs.1 crore – 10% of IT
- Surcharge for over Rs.1 crore – 15% of IT
Life Insurance for Tax Savings
As already stated, money saved is money earned. In order to provide relief to the taxpayer, the Government of India extends ample opportunities to avail of exemptions. It not only provides scope to the taxpayer to save, but also gives a fillip to different sectors who market instruments with inbuilt tax saving options. In the Indian context, life insurance plans from all companies like Life Insurance are extended generous tax exemptions. This covers both your premium payment and receipt of death, maturity or survival benefits. The relevant sections and their provisions in the Income Tax Act, 1961 for AY 2019-20 that cater to the savings associated with life insurance are:
- Section 80C: The premium paid for all types of Life Insurance during a financial year for a maximum of Rs.1.5 lakhs subject to certain conditions:
- Deductions are allowed for premium up to 20% of sum assured for policies issued prior to 31st March, 2012.
- Deductions are allowed for premium up to 10% of sum assured for policies issued on and after 1st April, 2012.
- Section 80D: Premium paid for Health Insurance Rs.25000 for self and family and Rs.25000 for parents.
- Section 80DD: Insurance expenses for disabled dependents for Rs.75000 and Rs.1 lakh for severe disability.
- Section 10 (10D): Benefits and proceeds from Life Insurance subject to certain conditions for the following.
The important aspect to note with Life Insurance plans, the amount of tax savings will depend upon the IT slab that is applicable to you. Higher the slab, higher is the quantum saved. In the present context and scenario, it is practically true that any Life Insurance product becomes totally tax-free investment. It is an added incentive to buy an Life Insurance product with adequate life cover in harmony with your financial goals.