Is life insurance a part of your tax planning

Introduction

A youngster’s first job gives him fresh hope and goals in life. He aspires to be wealthy and thrive in the future, so he begins to consider investing his savings as wisely as possible to maximize his returns. As a result, he invests in stocks, mutual funds (SIPs), fixed deposits, and other financial instruments. 

On the other hand, life insurance isn’t one of the most exciting possibilities because it’s not truly an investment but rather a tax-saving instrument. Life insurance used to be considerably more challenging to obtain in the past, but now it can be purchased with the click of a button. 

Aside from that, the reluctance to purchase life insurance originates from the fact that most employers have a group insurance policy in place for employees, and one may believe that this is sufficient, but that’s not the case as it has a reasonably low cover and does not provide you enough protection.

A proper tax planning helps in having a less burdensome sail when you are alive and would help in reaping long-term benefits. 

Permanent life insurance allows you to cover both bases at once, passing your assets tax-free (income and estate) to beneficiaries while also building up tax-deferred cash growth inside the policy. 

Why Consider Life Insurance?

When most people consider life insurance, they imagine how it will benefit those they leave behind. So, first and foremost, let’s discuss some perks of life insurance that your family can enjoy when you invest in different types of life insurance. Life insurance is a big umbrella that is a hub to multiple types of insurance services (they cater to people from different walks of life depending on their needs).

  • It can allow you to pay for your child’s future college education.
  • Establish a retirement fund for your spouse
  • You ensure that your family members have enough money to live the lifestyle you choose for them.
  • The policy helps you build security to have extra income when your earnings get reduced, and you look for a secondary source of income.
  • Life insurance policies help you save taxes. Essentially people buy insurance policies as they have to plan for saving taxes.

How does life insurance save tax?

Individual taxpayers purchase life insurance policies and invest to claim these deductions. The policy can be obtained for themselves, their spouse, dependent parents, or children. The deductions available to each individual vary. 

You are even eligible for tax deductions when you pay life insurance premiums. Here’s how you can qualify for the deductions:

  • Under Section 80C, you can claim deductions if the premiums are paid less than 10% of the sum assured in the policy.
  • Under section 10D, the maturity amount paid on the policy is not taxed if the premiums do not exceed 10% of the sum assured in the policy.
  • For claiming tax deductions for a health rider on your term insurance under Section 80D, keep in mind that you can have critical disease term insurance for yourself, your wife, and your children and are all under the age of 60 years, you are eligible for a tax deduction of up to Rs 25,000.
  • Furthermore, if you provide coverage for your parents under different but similar insurance and age over 60 years, you are eligible for a deduction of up to Rs 50,000. It also comes under section 80D. 

How do I choose the best life insurance policy?

You should know a few things before finalizing your life insurance coverage. A life insurance policy is unlike any other financial instrument where the primary goal is to protect your economic interests, and it should thus serve as the foundation of your financial planning. Assess your annual income, liabilities, existing coverage, age, and any financial dependents you may have before deciding on a policy.

These are the factors to consider before buying life insurance to save tax:

  • Life Insurance Cover – Tax deductions can be one reason to buy a life insurance policy. Still, life cover amount should be the paramount factor to consider while purchasing any insurance plan.
  • Policy Tenure – Check to see if you can pay the premiums for the duration. For example, if you are 40 years old and purchase a pension plan, you will require insurance coverage for 25 years. You will have pension coverage until the age of 65 years if you do this.
  • Corpus Growth – The reason for purchasing a life insurance policy is the most important. If you want to have a life cover.
  • Claim Settlement Ratio – Look for the company’s Claim Settlement Ratio (CSR). Though CSR has no effect on tax deductions, reviewing the claim settlement ratio ensures that you select a product from a reputable insurance firm.

What are popular life insurance policies that people buy to save tax?

As we know, life insurance policies can be a great tool to be part of your tax planning for the coming years. One will now look for plans where one can invest. Life insurance is an umbrella term under which different plans come like term insurance, ULIP plans, savings plans, etc. So we have shortlisted a few for you from which you can consider their advantages and what’s in there for you. Thus here are the popular tax saving life insurance policies that individuals can buy:

Buy a Term Plan

A term plan is the most basic life insurance policy, providing coverage for a set period. If the life insured dies during the policy period, the money assured is paid to the nominee. As a result, the term plan is the most economical life insurance policy because it provides maximum coverage at a low premium. You can look for the ABSLI DigiShield Plan, which is affordable and gives you a high life cover of one crore or more.

Buy a ULIP Plan

ULIP plans are investment plans where your premiums are invested in market-linked schemes and give the policyholder life cover. ULIP plans are also flexible as you can choose an investment, and they can easily switch between funds. Depending on the risk absorption capacity for the individual at the moment.

Buy a Savings Plan

Savings plans assist individuals in meeting their financial needs by making investments based on their risk tolerance. Those who wish to own a lovely home, a car, or a abroad trip choose a savings plan. These life insurance policies enable you to save money throughout your life by paying a premium for the rest of your life, and if you die within the term of the savings plan, your dependents will receive the death benefit. Like other types of life insurance contracts, savings plans also provide tax advantages.

Buy a Pension Plan

A pension plan is a retirement fund that you construct overtime to secure an income source in retirement. It is a long-term investment that grows with monthly donations. So, getting the best pension plan in India helps ensure a sizable fund for your retirement at a young age. In general, pension plans function in a variety of ways. An individual’s pension fund, for example, could be established by dividing payments between their employer and themselves. The employer usually is liable for a higher portion of it in this instance.

Conclusion

A life insurance policy is an excellent method to save tax on your money. However, getting it solely for tax saving purposes may not be the best option. Keeping your needs in mind will help you determine the premiums you can pay. Furthermore, being aware of the current tax law changes might help you receive the broader range of benefits offered on various products.