Life insurance is a basic necessity for any portfolio nowadays. It is the ideal option for securing your dependents and family members in case of any unfortunate situation in the future. This is essential if you want greater peace of mind while enabling your family members to meet future needs, repay debts, and cover any income losses in your absence.
The key thing to remember is that life insurance comes in several types. Pure term insurance covers life coverage for a fixed duration in return for premium payments. There are no maturity benefits, and the insurance company only pays the sum assured in case of the policyholder’s demise within the policy period. ULIPs (unit-linked insurance plans) combine insurance coverage with investments in market-linked instruments. There are also child plans, endowment plans, and other policies with provisions for maturity benefits or the return of premiums. While choosing the right kind of life insurance is essential, you should also pay attention to the budget of the current financial year and the tax benefits that you get. They are briefly covered in this article.
Tax Benefits that You Get from Life Insurance
Life insurance policies offer various tax benefits for policyholders. They include the following:
- Tax Deductions under Section 80C- Section 80C of the Income Tax Act offers deductions on premium payments for life coverage. Hence, the premiums you pay will be tax deductible up to Rs. 1.5 lakh per year. This is applicable for premium payments not just for yourself but also for your dependent children and spouse, subject to the overall limit. If you have bought life insurance before 31st March 2012, the premiums should be at most 20% of the sum assured to avail of this benefit. If the policy was bought on or after 1st April 2012, the premiums should be at most 10% of the sum assured.
- Tax Exemptions under Section 10 (10D)– The sum assured paid out by the insurance company is exempted from taxes under Section 10 (10D). This is for those payouts arising from the demise of the policyholder. Other payouts are also tax-exempted, subject to specific terms and conditions. For policies issued before 1st April 2012, exemptions are available if the total premiums are not more than 20% of the sum assured. This is 10% of the sum assured for policies issued after 1st April 2012.
- Tax Deductions under Section 80D- You can also get deductions under Section 80D on your life insurance policy. This is possible by adding a critical illness rider to a life insurance policy or any other health-related rider like surgical care, hospital care, etc. Section 80D offers tax deductions on premiums paid for health coverage for yourself, your children, and your spouse. The deductions are given up to Rs. 25,000 under this section. Additional deductions up to Rs. 25,000 may be availed on premium payments for dependent parents. If these premiums are for senior citizens, the maximum deduction is Rs. 50,000.
You stand to gain these tax benefits with your life insurance policy. It is worth noting that Section 80C and 80D benefits are in the form of direct deductions from your taxable income due to your premium payments. This gives you the opportunity to lower your tax liabilities every year with these investments, along with getting their additional benefits. The exemptions on the maturity amount are also beneficial for nominees or dependents in the future. Do keep these benefits in mind while buying life insurance.