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The market is flooded with a plethora of life insurance products. There are numerous insurance plans available, namely endowment plans, whole life insurance plans, annuity plans, and money plans, among others. Each of these insurance plans has a different financial goal, which may vary from individual to individual.
Term insurance is an insurance policy that offers life cover for a certain period of time and does not have a maturity benefit. In case of the policyholder’s death during the term, the insured’s loved ones will be paid the death benefit. This amount may be used to cover income loss in case the policyholder was the breadwinner of the family. Besides, it may be used to cover unpaid debt as well as meet other financial obligations.
It is important to note that there is no maturity benefit in a term life insurance plan. This means that in case you outlive the policy tenure, no benefits are paid. Such a plan offers only coverage against death, and hence such a plan is known as a pure life cover.
The good news is that insurance providers charge a low premium amount for term plans. In fact, premiums charged for this type of insurance are the lowest among all other types of life insurance plans. This is because the entire amount is used to cover risk and is not used for further investment.
A major advantage of investing in a term insurance policy is the tax benefit offered by the Income Tax Act 1961. This act offers numerous exemptions and deductions so as to reduce tax liability for taxpayers. You may therefore avail yourself of such deductions and lower your taxable income to a great extent.
You may avail yourself of the tax deduction on the premium paid towards your term plan under Section 80C of the Income Tax Act. This includes premiums paid for yourself, your spouse, and your dependent children. The maximum amount that you may enjoy tax benefit under Section 80C is ₹1.5 lakh.
There are certain clauses for deduction under this section. These include:
Members of Hindu Undivided Family (HUD), along with individuals, may avail of the tax benefits under this section.
The most widely used method for individuals to reduce their tax burden is Section 80C of the Income Tax Act. A maximum deduction of ₹1.5 lakh is available under this Section for all of the specified investments and instruments taken together. It consists of various investment alternatives like PPF, EPF, ULIP, and ELSS, as well as payments for things like home loan repayment, child’s tuition, life insurance premiums, etc.
The premium paid towards term life insurance is exempt from taxes under this Section, allowing the policyholder to avail themselves of deductions up to ₹1.5 lakhs (total of all investments and payments under this Section). Section 80C’s eligibility requirements for the tax advantage for term insurance include:
Besides saving tax through premiums, the insured may avail themselves of tax exemption on the death benefit amount. In case of the policyholder’s death, their family/nominee is entitled to receive the death benefit. Section 10(10D) states that this death benefit amount is totally exempt from tax. This benefit may therefore be availed of by the beneficiaries to reduce tax liability. The good news is that there is no upper limit on the tax benefit.
This clause, however, is not applicable under the following circumstances.
In the event that the term plan is issued on or after 1st April 2012, you may avail of exemption benefit only if the total premium paid does not exceed 10% of the sum assured amount.
Section 10 (10D) (Income Tax Act, 1961) allows individuals to benefit from tax exemption on the sum assured and bonus (if any) received through their policy claim. This exemption likewise covers the returns from a ULIP. Both salaried and non-salaried individuals, Hindu Undivided Families (HUFs), associations, trusts, businesses, groups of persons, foreign corporations, and others can request these exemptions.
Term insurance is one of the most beneficial products from all perspectives. Not only does it help you protect your family’s financial security, but also give you tax benefits. You have already seen how it benefits under Section 10 (10D).
Under Section 80D, a term insurance with critical illness cover can help you save taxes too. So, Section 80D offers a deduction of ₹25,000 on premiums that go towards term plan with critical illness cover.
The beneficiary may be required to pay taxes on the term insurance payout in one of two situations.
One instance is when the policyholder specifies in their application that the death benefit cannot be paid immediately after the decedent passes away. In these situations, the insurance provider retains the money and pays it once the interest-bearing term has passed. The beneficiary’s interest payment is considered taxable. Instead of the promised amount, the beneficiary must pay tax on the interest generated since the policyholder’s passing.
In another scenario, when the proceeds from the policy come in the form of an inheritance, the beneficiary is responsible for paying tax on the term insurance. When the policyholder omits the nominee information, the policy benefits occasionally go to the deceased’s estate.
Even though these situations are uncommon, when they do occur, the insurance proceeds become a component of the decedent’s estate and are therefore subject to inheritance tax. As the insurance firms require the policy buyers to include information regarding the primary and secondary beneficiaries, this rarely occurs. The secondary beneficiary is entitled to the payout if the primary beneficiary dies before the policyholder.