Term life insurance is often the best antidote to two of your dilemmas. You can financially secure your family and save on taxes. Experts feel that it should be an integral component of every portfolio. There are several advantages of purchasing term insurance policies, particularly from a taxation-related perspective. This article takes you deeper into these aspects, starting with a basic overview of what term insurance entails.
Term insurance- An essential guide
Term insurance offers life insurance coverage for a specific period and does not provide any maturity benefits. In these policies, the insurance company pays a death benefit to the nominee upon the policyholder’s demise within the policy period. This amount will secure the family’s financial future and cover the loss of income. If the policyholder outlives the policy tenure, then there is no payout for the same. The term insurance premium is comparatively lower for higher coverage. There are several tax benefits offered by term life insurance. Here’s taking a look at the same.
Tax Benefits of Term Insurance
There are numerous tax benefits available for policyholders. Some of them include the following:
- Section 80C offers deductions up to Rs. 1.5 lakh on the term insurance premium payments. It applies to premium payments for you, your spouse, and your children. However, for policies issued on or after 1st April 2012, if the premium amount crosses 10% of the sum assured, then the maximum deduction is 10% of the sum assured amount. If the plan was bought before 31st March 2012, the deduction would apply to the premium with a limit of 20% of the sum assured.
- Section 10 (10D) offers tax exemptions on the death benefit paid by the insurance company to the nominees of policyholders. This is completely exempted without any upper limits.
- Section 80D deductions on health insurance coverage are also possible with term insurance policies. Adding a critical illness rider or any health-related rider gets deductions up to Rs. 25,000 under this section. If you are a senior citizen, then you can get deductions up to Rs. 50,000.
These are the tax benefits on term insurance policies, encompassing deductions and exemptions. These are the advantages of availing of term insurance plans. However, there are scenarios where beneficiaries may have to pay taxes on term insurance payouts. One situation is when the policyholder mentions in the application that the death benefit is not immediately payable after a demise. The insurance company keeps the funds and pays them once the interest-bearing period concludes. The interest payment is taxable in this case.
Another situation is when the policy proceeds come through an inheritance. Beneficiaries will then have to pay taxes on the payout. The policy benefits sometimes get transferred to the policyholder’s estate if the nominee’s details are not provided earlier. These are rare scenarios though they happen at times. Whenever the insurance payout is added to the deceased individual’s estate, it will be subject to inheritance taxes. Most insurance companies, however, require information on primary and secondary beneficiaries from policyholders. Hence, it is rare to encounter any such situation. The secondary beneficiary will get the payout in case of the demise of the primary policyholder.
Be cautious while choosing your term insurance policy. You can use an online term insurance premium calculator to calculate the premium payable for your plan. You can also choose the premium payment frequency, i.e. monthly, annually, quarterly, etc. You can flexibly choose this for maximum convenience. You can also select the tenure of your policy with the coverage amount. Ensure you get the highest possible coverage for the lowest possible premium amount. However, skimping on coverage will only lead to issues in the future. Hence, ensure that you choose suitable coverage amounts to cover your family’s future lifestyle, financial requirements, objectives, and current liabilities. Accounting for everything, term insurance is the best way to save on taxes and also financially safeguard your family in any untoward situation.
