Hello there! You’ve come here while looking for ways to save as much money as possible on your taxes? You’ve arrived at the correct location. Here we will see how a term insurance plan can help you save money on taxes paid.
Purchasing a life insurance policy, according to many taxpayers, is one of the simplest methods to save tax. It becomes an even more appealing argument for last-minute tax savers who want to complete the tax-saving exercise before the March 31 deadline.
However, purchasing life insurance as a quick fix solution to save taxes may wind up negating the exact aim of the exercise, which is to give financial security to your family. That’s why investing your money is a sensible decision in life insurance options. So let’s get started.
What is Term Insurance?
Term insurance is a simple coverage plan that takes effect once a predefined payment is paid for a set period of time. If the insured person dies during the term, the beneficiary receives a death benefit, which can be paid in a lump sum or in installments. This means that your family doesn’t have to worry about their usual life finances after you are not there, and all of their life goals will be met.
Term insurance is there to safeguard your family’s financial future. After your loss, due to lack of sole breadwinner, the family’s wealth and reserves would have been depleted if a term insurance policy had not been purchased. If you have dependents on your salary or if your contribution to the family’s income is significant, term insurance is a must for you. On the other hand, if you survive the term policy, you will not get any maturity benefits, but you will have peace of mind knowing that your loved ones are safeguarded because you purchased a term insurance policy.
Benefits of Term Insurance
Here’s a list of term insurance benefits which will make you think “why I haven’t opted for term life insurance yet !”
Affordability: You can purchase a term life insurance at a low cost with high coverage limits. For example, a term plan worth Rs.1 crore can be obtained for Rs.490 per month. Yes, that’s low it could be !
Whole Life Coverage: The USP of a term insurance policy is that it covers you until the age of 100. It is a long enough duration of coverage that offers you protection and peace of mind for a longer period of time.
Compensation on death of the life insured: If the life insured dies during the policy period, the nominee or legal heir named in the policy receives the sum assured promised as compensation. To meet the policyholder’s specific financial needs, the benefit can be received in either a lump amount or as a monthly distribution.
Terminal Illness Coverage: Terminal Illness is a built-in benefit in the term plan. The insurer will pay the policyholder a lump sum amount if you are diagnosed with the critical illness.
Tax Benefit: A term plan provides a tax benefit on premiums paid under Section 80C of the Income Tax Act of 1961.
Critical Illness Coverage: If you have chosen the critical illness additional cover, the insurance will pay you a lump amount if you are diagnosed with any of the specified critical illness diseases like cancer, or any chronic disease. The condition only applies if you purchased the coverage at a higher premium rate with additional riders.
Accidental Death Benefit: As this is a whole life term plan, this covers the policyholder in case they die due to any accident. But hey, this doesn’t mean that you’ll drive carelessly, follow the rules and wear a helmet while riding a two wheeler.
How to Get Tax Benefits on Term Life Insurance
For many, the main motivation while purchasing a term insurance policy is to take advantage of tax benefits and save money while financially protecting your loved ones’ future. Let’s take a closer look at the effects of tax breaks under different sections.
Tax Savings Under Section 80C
- Term insurance plan gives tax benefits under Section 80C of Income Tax Act, 1961. Under this section, you can get a tax deduction of up to Rs.1.5 lakhs for the premium that you have paid for purchasing the insurance plan.
- Section 80C allows you to claim a tax credit if the premium you paid is less than 10% of the sum assured and the policy was issued after April 1, 2012.
- In a specific case, if the life insurance policy covers a disabled person as defined by Section 80U or an illness as defined by Section 80 DDB, deductions can be claimed under Section 80C, but only if the premium does not exceed 15% of the total insured.
Tax Savings Under Section 80D
As previously stated, term insurance contains health riders that can be added to your main term plan. The health riders also allow you to claim Section 80D tax breaks for term insurance. Because Section 80D exempts some medical expenses from taxation, you can, for example, claim a deduction for the critical illness rider you purchase with your term insurance.
Remember to use the term insurance plan calculator to estimate the amount of coverage you require. If you use riders, make sure to check the additional exemption you get under Section 80D for some of them.
Tips to choose the best Term Plan.
With everything that has been said about how you can save money on taxes by purchasing term life insurance, here are some things you should keep in mind before purchasing a term plan:
- Premium Payment Term: Look for a plan that allows you to choose the frequency of your premium payments. If you like, you can choose to pay the premium in one lump sum payment or in monthly installments or in quarterly manner.
- Insurer’s Solvency Ratio: You should request the insurer’s solvency ratio, which reflects the family’s financial capacity to settle claims. For life insurance plans, the favourable solvency ratio is 1.5.
- Insurer’s Claim Settlement Ratio: You would put your trust in a company that settles claims as quickly as possible. If the claim is handled fast, the company’s financial integrity can be determined, resulting in mental contentment after purchasing the product.
- Additional Rider Covers under the Plan: Additional coverage in single life insurance policy is always favourable. Thus, check whether you are allowed to have additional riders under the plan or not. If yes, then at what price are they available. Keeping in mind the current scenario and spread of diseases, you should buy a critical illness cover for yourself in case anything happens.
Term insurance is without a doubt, a reliable protection plan meant to ensure a safe financial future for your loved ones and help them achieve various family financial goals. A term plan can also help you earn tax benefits under different income tax exemption, such as 80C and 80D. Thus one should purchase a term life insurance to not only maximise your tax saving benefits, but also to acquire more advantages by first reviewing the conditions that must be met.