Should I take Term Insurance to save taxes?

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Rajesh, aged 29, was getting married in just a few months. He worked as superintendent at a coal mine in Jharsuguda, Odisha. Due to his exposure to the coal dust in the surrounding environment, he understood that the job was not favourable. But his responsibility and the new member of the family motivated him to work more. The salary package was good, which hooked Rajesh for some more time to the job. During this tenure, he thought of buying a Term Life Insurance policy of Rs.50 lakhs to save tax with the term plan and financially secure the family members.

Rajesh had decided to buy a Term Plan because it was affordable and pocket-friendly. If you, like Rajesh, wish to create secure platforms for your family, a term plan is the bare minimum arrangement you can make.

Below are the details and insights into the benefits you can draw from a term plan. Let us look at these step-by-step.

What is a Term Plan?

A term plan is a life insurance policy that you purchase for a specified period. The premium under the term life insurance is affordable.It is the only policy in which the sum assured can be higher but the premium under the policy is very low.

According to the conditions of the term plan, if the policyholder passes away during the policy term, the nominee defined under the policy receives the sum assured as the benefit. This might leave anyone to think that the term plan does not offer any survival benefit to the policyholder who pays for it throughout. It may be a hard fact to swallow but the fact is that a term plan is a traditional life insurance policy which does not offer a huge financial  advantage except saving tax until the policyholder is alive.

For the insured, it is just a financial corpus built over many years for the family and dependents to achieve their future goals. But the fact is that other than the afterlife gains, the policy allows the policyholder to save income tax deductions.

Let us see the term insurance tax benefits under specific sections of the IT Act.

Term Insurance Tax Benefit under Income Tax Act,1961

Buy a term plan to save tax! Heard of it?

If that’s true and you have not been able to save taxes because there is no financial advice about saving money, the first thing you should do is immediately buy a term plan.

The primary intent of the policyholder must be to buy a term plan to save taxes. On a broader aspect, term plan- a pure insurance policy can benefit with tax savings until the policyholder is alive.

These are the tax benefit under Income Tax Act, 1961 when you buy a Term Insurance:

  • Tax Savings under Section 80 C: The premium amount you pay under the term plan allows you to claim the deductions under tax and save money. Under section 80 C, you get the benefit of Rs.1.5 lakhs. It applies to the policies that were issued before 1st April 2012.
  • Tax Benefit under Section 10(10D): If the policyholder dies, the nominee’s amount as the benefit is safe from tax deductions under Section 10(10D). The idea is to provide maximum returns to the nominee without losing taxes. But this maturity amount is free from taxes only when the premium amount is not more than 10% of the sum assured.
  • Tax Implication under Section 10(10 D): On the other hand, if the policy premium paid is 20% of the actual sum assured, then the maturity amount under Term Insurance is taxable under section 10(10D).

Other important information on tax savings under a Term Plan. 

  • Term Life Insurance premium paid for spouse or children is also eligible for tax exemption.
  • Term Plans issued after 1st April 2012 can get the tax benefit limit set to 10% of the sum assured.
  • If the person is suffering from disability listed u/s 80 U or from any other illness mentioned under section 80 DDB, the tax benefit limit offered is 15% of the total sum assured.
  • Under section 80C (5),if the insured surrenders the term policy voluntarily within 2 years from the date of commencement, no tax benefit will be offered.

The tax benefit under section 80 C applies to the total premium paid in a year. Thus, if you stop paying the premium for your term plan, the cover ceases to exist. In such a case, the nominee receives nothing, and there will be no tax deductions.

Is it worth having term insurance?

Considering the only tax benefit for the policyholder, ordinary people think about whether having term insurance is worth it or not? In answer to this, a term insurance policy is a financial arrangement for your family and loved ones. It is to support their needs financially when the policyholder is not alive. Nothing lies above the family’s happiness; hence, it is worth having term insurance.

Term Insurance: More Than a Tax Saving Instrument.

Now it is clear that the term insurance policy is a tax saving instrument also for the people other than creating financial safety for the family. It has always been easy to buy a life insurance policy for ages to save tax. Term plan, being the affordable plan, is the most convenient option for those who often work for it at the last minute.

Before buying the policy the next time, you must keep these things in mind:

  • The limit of income tax benefit under the term plan allowed is Rs.1.5 lakhs. This does not mean that you pay this limited amount of premium. The policy you choose is for your family. Hence, the sum assured as well as the premium can be higher.
  • The premium you pay reduces your savings; hence always be mindful of the sum assured which is needed for the term policy. Make sure that the sum assured limit is in tune with future goals of the buyers.
  • Also, know that the term insurance policy comes with the riders these days. One of the riders for the policyholder’s benefit is the Return of Premium option. The premium amount is higher in this case, but the entire premium paid is gained back only if the policyholder survives the policy term.

Conclusion:

Term insurance, as discussed, is pure protection for the family. It is advisable that everyone must buy a term insurance policy. The premium that is paid against the term life plan gives an income tax benefit. The tax benefit helps the buyer improve the savings and plan protection for the dependents in the family. For more information, one must read the details on the best term insurance and the associated tax benefit.