We have been closely observing savers and investors for almost two decades now, and even though the average Indian saver is now much more conscious and smart than earlier, selecting insurance still tends to be a blindspot. Most of us usually end up buying whatever insurance policy is proposed to us by an agent in our bid to save tax under section 80C before the 31st March deadline. In India, Section 80C allows a deduction of up to Rs 1.5 lakh from our annual income for taxation purpose. In the last-minute rush, we often select unsuitable insurance products. But with a little bit of knowledge and forethought, this problem is not that hard to fix.Given the wide range of life insurance products available in the market today, selecting the right insurance policy on your own might seem complicated and overwhelming. But that need not be the case, as the only type of life insurance policy that you really need is a term plan. What’s more, term insurance fetches you tax exemption too.
But before reading further, remember that saving on taxes shouldn’t be your prime decider for buying insurance. You must first consciously evaluate your need for insurance. For example, if you have dependents, you must buy it irrespective of whether you have any exemption limit under Section 80C to avail or not.
We should firmly believe that as a thumb rule, the life cover provided by an ideal term plan should be at least 10 times your annual income. For example, if one is earning Rs 10 lakh a year and has financial dependents, he/she should buy a term plan with a cover of Rs 1 crore. Now here, don’t shortchange your family and don’t get scared by the amount of life cover. Term plans are effectively very cheap. For example, for a 35-year-old healthy male, a Rs 1 crore life cover would not cost more around Rs 13,000 a year. That is only Rs 1,100 a month.
Tax Benefits in Term Insurance
Moreover, the premium that you pay for a term life insurance policy can also be claimed as a deduction under Section 80C of the income-tax act. Additionally, while buying the term plan, it may also be worthwhile to go through the available riders and consider adding one that makes good sense to you. Riders not only add benefits to your basic life policy but can also help you get additional tax advantage. They are basically additional benefits that can be added to the simple life cover at a nominal cost. Following are some riders that are generally available with term plans.
- Accidental death benefit: Under this rider, if the policyholder dies in an accident during the policy term, then an additional amount – which might be less than or equal to the sum assured – will be paid to the nominee.
- Disability income: As the name suggests, this rider guarantees a monthly income for a specified time, say 8-10 years, from the insurance company in case the policyholder becomes totally disabled due to an accident.
- Critical illness benefit: Under this rider, the insurance company company promises to pay a lump-sum amount on the diagnosis of a specified dreaded disease, such as renal failure, cancer, etc. Every insurance company has a list of illnesses that fall under the rider. God forbid if you are diagnosed with one of them during the term of the policy, the insurance company will pay you an amount equal to the sum assured irrespective of the actual treatment cost.
Again, the additional premium paid for all these riders can also help you save on the tax outgo. This is because, while the premium paid for any life-related rider such as an ‘accidental death benefit’ is eligible for deduction under the same section, Section 80C, the premium that is paid for any health-related rider like a ‘critical illness benefit’ falls under the purview of Section 80D. Section 80D provides an additional deduction of up to Rs 25,000 (Rs 50,000 in case the policyholder is a senior citizen) for the premium that you pay for a health insurance policy. Plus an additional deduction of the same amount is available if you buy a health insurance policy for your parents.
However, you should not end up buying a rider just for the sake of it or simply because it is available at extremely low costs. No matter how cheap or affordable a rider is, multiple riders will definitely escalate your total premium, which may start pinching your pocket. So as a ground rule, always ask yourself whether you really need that extra cover. You have to beBe selective and judicious while choosing the riders. For example, say if your job requires you to travel a lot, it would be prudent and practical to buy an accidental death benefit rider.