- Term Plans offer a high coverage at affordable premiumsTerm insurance offers tax benefits U/s 80C on insurance premium paid for yourself, your spouse, and your children.
- Term plans with critical illness cover offer tax benefits on premiums paid up to ₹ 25,000 U/s 80D
- Claim amount received in case of an unfortunate event is tax free U/s 10 (10D)
Shashi and Mahesh are two friends in their mid-20s. They meet for an evening walk in the park. While talking about work and finances, Shashi said, “I need to file my taxes for this year. I was wondering how I could save taxes. Many people are suggesting I get a life insurance policy for myself. I think I am at a stage in life where I should have a life insurance cover but I have no idea how they help in tax saving and which plan I should buy”
Mahesh replies, “If you haven’t taken a life insurance cover yet, buy a term insurance plan without fail.”
“Why a term insurance plan?”
“Because a term insurance plan is affordable as the premiums are quite low. You can get a higher life cover amount and it will ensure your family will have a sufficient financial back up in case something happens to you”
“But how does it help with tax saving?”
“Term plans offer tax deductions at different points of the policy tenure.”
Like Mahesh, a lot of prudent advisors recommend term insurance as the primary life insurance plan. Let us take a look at what makes term insurance a great life insurance choice.
Term insurance has become popular over the years because it has dual benefits:
● Affordable Insurance Premiums
The reason term insurance is a crucial part of your financial planning is because you can get a higher life cover for lower premium. For example, if you, as a non-smoker want a life insurance cover for ₹ 1 crore, you can get a term insurance policy for a premium of less than ₹ 8,000 p.a*. If you are a smoker this premium amount will be slightly higher.
Along with term plan, you can also opt for a critical illness rider at a nominal additional cost. It will provide you a sum assured upon being diagnosed with any of the covered critical illnesses. This can protect your savings getting spent on treatment costs.
● Tax Saving Instrument
Let’s take a look at the tax benefits of term insurance:
1. Under Section 80C, you can claim deduction from your taxable income on premium paid towards term insurance. This premium can be for yourself, spouse, and children. This deduction is allowed up to a maximum limit of ₹ 1.5 lakh.
2. Term plans with critical illness cover also offer additional tax benefits on premiums paid up to ₹ 25,000 under Section 80D.
3. Tax benefits are also available, under Section 10(10D), on the money that your family receives in case of an unfortunate event.
Let us learn this with an example:
Any person below 60 years of age and having an annual basic salary/ income of ₹ 5 lakh will have to pay an income tax of Rs 12,500. However, if you are paying life Insurance premiums, you can reduce your taxable income by up to Rs 1.5 lacs and hence save on tax.
