How Can Life Insurance Policies Help You Save Taxes?

How Can Life Insurance Policies Help You Save Taxes?

Mumbai (Maharastra) [India],October 9 :The market offers a diverse range of financial instruments designed to meet the average investor's short- and long-term objectives. They come in a variety of budgets and each one of the financial tools has different risk requirements, and each appeals to investors with diverse backgrounds. However, there is one investment option that has always been relevant and beneficial to investors of all types: term insurance. 

Whether you are an individual or the financial provider for a family, a dependable term insurance plan among different types of life insurance can provide your dependents with much-needed financial coverage in your absence.

However, there is another reason why term insurance should be considered a necessary part of any investment portfolio. Aside from providing financial security and peace of mind, term insurance can also significantly reduce your tax burden. Let us take a closer look at how you, too, can benefit from the various term plan tax benefits available to you.

How Can Term Insurance Help You Save Taxes?

Before we get into how one can avail of tax benefits from different types of life insurance plans, let's define what a term plan is. A term insurance plan is essentially a type of life insurance that provides coverage to a policyholder for a specified time period, or "term." Compared to traditional insurance, term plans have significantly lower premiums. They are also more accessible and provide far greater flexibility to the policyholder.

Regarding term plan or life insurance tax benefits, the Indian government and the Income Tax Department have established several provisions for deducting term insurance premium payments. Tax benefits are available to policyholders under three sections of the Income Tax Act of 1961, namely Sections 80C, 10(10D), and 80D. These deductions, whether taken individually or in combination, significantly reduce your taxable income and thus help you save taxes for each year till your life insurance plan is active. 

Tax-Saving Benefits of Term Insurance 

Now that we've covered the fundamentals of how not just a term plan but any types of life insurance can reduce your tax liabilities, let's get into the details. To take advantage of term plan tax benefits, here are some of the most common tax deductions that can reduce your taxable income:

Section 80C: One of the most common deductions available to life insurance policyholders in India is under Section 80C of the Income Tax Act of 1961. When you avail of any life insurance policy, the policyholder is required to pay a monthly amount to the insurer, known as premiums. Under Section 80C, life insurance premium payments can be deducted from your total income up to Rs. 1.5 lakh per year. As a result, this lowers your overall taxable income, which is extremely beneficial to life insurance policyholders. This deduction under Section 80C is available to both individuals and Hindu Undivided Families (HUFs). Individual policies allow for tax deductions for the policyholder, their spouse, and their children.

Members of Hindu Undivided Families (HUFs) are eligible for all tax benefits available to individual policyholders. However, there are a few things to keep in mind when purchasing life insurance policies in order to receive tax benefits under Section 80C of the Income Tax Act.

a. If you purchased life insurance before March 31st, 2012, the premiums paid should not exceed 20% of the policy's sum assured.

b. If you purchased your life insurance policy on or after April 1st, 2012, the premiums you pay should not exceed 10% of the policy's sum assured.

c. If you purchased the life insurance policy on or after April 1st, 2013, the maximum tax deduction you can claim is 15% of the total sum insured. This applies only to life insurance policies issued in the name of a person suffering from a disability listed under Section 80U or an ailment listed under Section 80DDB.

Section 10 (10D): While there are several term plan tax benefits available, the primary goal of any types of life insurance policy is to provide financial security for your beneficiaries. In the event of your untimely death, this financial security is transferred to your loved ones in the form of a predetermined amount known as the death benefit. This amount has a tax-saving advantage because it is completely exempt from tax under Section 10 (10D). This also applies to the maturity amount received at the end of a term plan with the money-back option.

Section 10(10D) of the Income Tax Act provides for tax exemptions on payouts made to life insurance policyholders as a survival benefit upon maturity. This also applies when the sum assured is paid to the policyholder's nominee as a death benefit. However, there are several factors to consider when applying for tax exemptions under Section 10(10D) of the Income Tax Act.

a. For policies issued until March 31, 2012, only payouts made as death benefit to the policyholder's nominee are exempt from taxes.

b. Section 10(10D) of the Income Tax Act allows for tax exemptions on payouts for insurance policies issued prior to April 1st, 2012, if the total premiums paid do not exceed 20% of the total sum assured received.

c. For insurance policies issued after April 1st, 2012, tax exemptions are applicable if the total premiums paid do not exceed 10% of the sum assured.

d. Tax benefits are not available under Section 10(10D) if the payout is made under the Keyman Insurance policy. The Keyman Insurance Policy is a special life insurance policy offered to employees that pays out in the event of the death of a company's or organization's top management.

So we are saying,

Individuals who pay premiums on life insurance policies are eligible for the tax benefits. Tax benefits are a major reason why life insurance is a good investment tool. With these deductions in place, policyholders with term insurance can significantly reduce their tax liabilities. These life insurance plan tax benefits, as well as term insurance's ease and accessibility, are driving its popularity among insurance seekers.