Make the Most of Your Term Insurance Plan with its Tax Benefits

Term insurance a type of life insurance policy that provides coverage for the beneficiary’s family in case of pre-mature death for a pre-defined duration. Not only is this one of the most affordable insurance products, but it also has additional benefits attached for the Indian consumer.

What is Term Insurance?

To state precisely, term insurance is a form of life cover. In case of death of the beneficiary, the family will receive the sum assured in turn helping the family to remain financially sound and fulfill any family obligation such as loans, children’s education, medical emergencies, etc. No benefit is paid to the beneficiary in case he/she survives the term period. Nevertheless, a beneficiary can purchase a return-of-premium along with their term insurance policy for approximately 20-30 years. In this instance, if the beneficiary expires during the term, the family will receive the sum assured. However, if the beneficiary outlives the term period, the entire amount paid shall be returned to them (without any interest). The added advantage is the amount returned is non- taxable.

Who can purchase Term Insurance Plans?

A term plan can be bought by any person who has financial dependents. An individual between the age of 18years old - 65 to 69 years old is eligible to buy a term plan for their family, in case of untimely death.

Why should you opt for Term Insurance?

Many people think of term insurance as an income investment, but that is not true. The purpose of purchasing a term insurance policy should not be as an income source but to provide support to your family in case of life uncertainties. The sum assured received by your dependents can be used to reduce their financial hardships in case of your demise.

What are the advantages of owning a Term Insurance Policy?

Enlisted below are 6 advantages of owning a term plan:

• Affordable: Term insurance is the most economical type of life insurance product. The plans offer high coverage for reasonable premiums. Compared to permanent plans that offer guaranteed returns, term insurance policies ensure that you receive a significantly large amount of sum assured for a relatively lower cost.
• Higher Coverage: The best aspect of term insurance is that you do not need to invest a huge sum of money per month to avail of overall coverage. Hence, not only are they affordable but also provide higher coverage with additional benefits for your family’s financial security.
• Flexible periods: With so many different insurance providers and the variety of plans they provide, you can opt for plans starting from a year up to 30 years or more. You can choose a plan, either short or long term, according to your financial requirements.
• Tax Benefits: Most are not aware of the fact that term insurance comes along with a great deal of tax saving. You need to know that the tax-saving benefit regarding term insurance comes under which section of the Income Tax Act ?.To answer this question, there are three sections you can cater to - Section 80C, Section 10D, and Section 80D.
• Additional Rider Benefits: You can also attach add-ons to your term plan to build a package that meets your financial requirements such as Surgical Care Rider, Critical Illness Rider, Accidental Death Benefits, etc.
• Numerous options: As an Indian consumer, there are various plans for you to shop around. You can go about and compare rates, check out the best coverage period, term periods, and premium amounts, and choose according to your own needs.

Tax Benefit for a Person holding Term Insurance

Section 80C of the Income Tax Act, 1961, is the most preferred section amongst taxpayers as it provides tax exemption on the premium paid for your term plan. An Indian taxpayer is eligible for a tax deduction of up to 1.5 lakhs per annum on their term insurance policy. This benefit can be availed by an individual (beneficiary), their spouse, and their dependent children.

Certain conditions to avail of the tax deduction:

• If one has purchased a term insurance plan on or before 31st of March, 2012, then tax deductions will be only for the total premium amount up to a maximum of 20% of the Sum Assured.
• If one has purchased your term insurance plan on or after the 1st of April, 2012, then tax will be deducted only for the premium total that equals a maximum of 10% of the Sum Assured.
• In case any individual is disabled or suffering from any sort of critical illness, and has purchased a term insurance plan on or after 1st of April, 2013, then tax will be deducted only if premiums above or equal to 15%  Total Sum Assured, have not been paid.
• A member of the HUF i.e. Hindu Undivided Family can also avail of tax deduction under this section.

Tax Deduction on Claims for a Person holding Term Insurance

Income Tax Act, 1961, Section 10D, offers tax exemption on death and maturity claims. Under this section, the Sum Assured that the nominee gets as a death benefit or maturity benefit of the term insurance policy, including accrued bonuses, is tax-exempt. This is applicable even if one gets an amount from a foreign country, apart from India.

Certain conditions to avail of the tax exemption:

• The clause will not be applicable if any sum of the amount is received under Sec 80DD [3] or 80DDA [3]. This is because, under Section 80DD[3] and 80DDA[3], if the handicapped dependent dies before the person financing his medical cost, then the sum of money will be treated as income and taxed accordingly.
• No amount should be collected as part of the Keyman Insurance Policy
• No amount should be received which isn’t a death benefit portion for a term insurance policy that has been issued on or after April 1, 2013, and on or before March 31, 2012.
• The total premium amount paid during the term policy period should not exceed 20 per cent of the Total Sum Assured.
• The total premium paid amount in the term policy should not exceed 10% of the Total Sum Assured if the term policy is issued on or after the 1st of April,2012

Tax Benefit on Add-on Covers for a Person holding Term Insurance

Income Tax Act, 1961, Section 80D, offers tax benefits on add-on covers. This means that if your tax insurance policy has an additional rider cover in form of Accidental Total Permanent Disability Rider, Critical Illness Rider, Hospital Care Rider, Joint Spousal Cover, etc. then one can get tax benefits.  This benefit can be availed by an individual (beneficiary), their spouse, their dependent children, and their parents either dependent or not.

Certain conditions to avail of the tax benefit:

• The sum of tax deducted can amount to Rs 25,000/- only
• An additional sum of Rs 25,000/- can be deducted in case the term policy is in name of the beneficiary’s parents.
• A higher sum amounting to Rs 50,000/- can be deducted in case the term policy is in the name of the beneficiary’s senior citizen parent name.
• A member of the HUF i.e. Hindu Undivided Family can also avail of tax deduction under this section.

What is the Free Look Period?

If an Indian consumer is not happy with the term plan they just purchased, they can refund the amount in the free look period. IRDA has created a provision for such cases known as the free look period. Under this provision, if an individual has bought a term insurance policy and they are not happy with the terms and conditions attached to the same, they can unquestionably return the plan to the respective insurer within a specified duration mentioning their reason to do so along with the original term insurance policy documents and then are subject to a refund.

Within 15 days from the date mentioned in the receipt of the policy documents, a person can opt for a refund. In the case of distance marketing, the specified duration increases by an additional 15 days, making the free look period a total of 30 days from the date mentioned in the receipt of the policy documents. By doing so, the insurance company will generate the refund subject to any kind of deduction corresponding to the risk premium for the cover period, any medical expenses incurred, and stamp duty.

Conclusion

Term Insurance is one of the most efficient ways to secure your loved one’s financial needs but along with the same, it also ensures various tax benefits making it one of the top tax-saving tools. Every individual should be well aware of their tax benefits before making any sort of investments for themselves or their family. Understanding and having complete knowledge about term insurance family aids to your financial well-being so you can make the most of it.