Insurance tax benefits and term insurance
Mr. Sinha's family was left bereaved when he lost his life due to a sudden heart attack.Mr. Sinha was the sole earning member of the family and was making his financial decisions himself.While the emotional loss incurred was unsurmountable but the family was tension-free when they came to know that Mr. Sinha was adequately covered through term insurance. Though Mr. Sinha invested in theterm insurance plan for availing insurance tax benefits, he had never thought that it would protect the financial future of his family in his absence.
Therefore, a dire financial crisis which would have occurred due to Mr. Sinha's death was averted due to this term insurance.
Sound like a nice story, but did you get the crux? It was the term insurance plan which played the hero and saved the day for the family in the time of this crisis. Though the loss of a life cannot be compensated by any means, the term insurance plan aptly compensated for the financial loss which accrued following Mr. Sinha's death.
Does your story too have a term plan hero? Life is uncertain and even though we do not like considering the prospect, death is inevitable. If you are the sole bread earner of your family, have you considered how your family would manage if something unfortunate happens to you. Therefore, a term insurance is a necessity for every individual and its importance cannot be ignored.
Definition of term insurance plan
A term insurance is a pure life insurance protection plan which provides coverage against the risk of death for the specified period for which it is taken. During this period, if the person whose life is insured dies, the sum assured is paid to the nominee or the beneficiary of the policy. The sum assured is the amount of life cover which is chosen at the time of buying the policy. The benefit under the plan is payable only if the person insured dies. If the plan completes the stipulated term and the person insured is alive, the plan matures and no maturity benefits are paid.
The benefits of term insurance plan
Term insurance plans are designed solely for protection purposes. The plan presents three unique benefits which are discussed below -
- Higher Sum Assured – the amount of sum assured which can be opted under a term insurance plan could be very high. If you qualify under the underwriting norms of the life insurance company, you can avail very high levels of sum assured. So, whether you want coverage of Rs.50 lakhs, Rs.2 Crores or Rs.10Crores, a term plan would allow you this coverage.You should choose the sum assured very carefully based on your family's future financial needs and your current liabilities.
- Lowest premiums – if you are afraid of opting for a higher level of sum assured due to the fear of high premium, relax! A term insurance plan is the cheapest form ofinsurance provided by the life insurers. The premiums charged are extremely low and easily affordable compared to the high levels of sum assured. No other plan of insurance promises such high levels of life coverage at such low premium rates.
- Income Tax benefits - The policy holders can avail a tax rebate on the premiums paid upto Rs 150,000 per annum under Section 80C of the Income Tax Act 1961. The maturity benefits paid (in case of term plans with return of premium) is also tax free under Section 10 (10D) of the income Tax Act 1961.
Further, the claim amount received, in case of policy holder's death is also tax free in the hand of the recipient (nominee or beneficiary).
The variants of term insurance plans
- Pure term insurance plan – These plans which we have been discussing since starting of this topic, provide only death benefit when the insured dies within the chosen term of the plan. In case the life assured survives till plan maturity nothing is paid.
- Term insurance plan with return of premium – As the name suggests, these plans go one step further than pure term plans. These plans provide complete financial protection to your family when you are not around and return the premium back in case you survive till maturity. So you are completely at peace and enjoy life knowing that financial future of your family is protected.
You may check this link to understand it better https://insurance.birlasunlife.com/our-solutions/protection/bsli-future-guard-plan.aspx
- Increasing Term Plans – under these plans, the sum assured chosen at the commencement of the plan increases every year throughout the plan tenure at a certain percentage - say 5% or 10%. You can choose a level sum assured at the beginning of the plan and then opt for increasing sum assured annually. As the sum assured increases every year, the plan premium also increases annually. This is a unique plan as it works as hedge against the rising living cost with an option of increasing Sum Assured. On death, the increased coverage at the time of death is paid.
Know more about increasing term planhere:
The Dilemma while taking a term insurance plan
Despite the above mentioned benefits, people facea dilemma when they consider investing in a term insurance plan. Since term insurance only promises a death benefit to your family, the lack of any return on plan maturity is a common dilemma to the person taking the policy. Less awareness about term insurance plan coupled with no maturity benefit to the policy holder is the main reason why term insurance plans are given a miss by many of us.
How much life coverage one should buy under a term insurance plan
An adequate term plan cover is a relative subject and depends on your financial situation, size of the family, your current earning & life style,assets and liabilities. A fact finding exercise with help of a financial advisor could be a good idea to assess your future requirements based on which the life cover can be decided.
However, leading financial advisors suggest that you should take a term plan equivalent to 10 – 12 times of your annual income. For example – if your monthly salary is Rs 50,000, then taking a life cover of around Rs 60 Lakhs can be adequate. This is simply because your family can get Rs 60 Lakhs in case something happens to you and also assuming that they can earn approx 8% on the total amount received; they will be able to comfortably carry on with their financial needs.
However, this is only a starting point and you should also account the other liabilities that you might have, like - your home loan, car loan and personal loan etc. You should add all these liabilities along with the above life cover and then decide the final life coverage amount.
Insurance Tax benefits on term insurance
The unique benefit of having a life insurance plan is that you can avail insurance tax benefits of upto Rs 150,000 per annum under section 80C of the Income Tax Act 1961.
The return of premium (in case of certain term insurance plans) in case the life assured survives is also tax free. In case of unfortunate death of the life assured, the claims received by the nominee are also tax free under Section 10 (10D) of The Income Tax Act. Therefore, it is one of the few saving products which provide you tax benefits on your investments and also on receipt of the claim proceeds by the nominee.
Due to rising inflation, the lifestyle expenses are going up like anything. In a scenario like this, meeting such lifestyle expenses of the family in absence of the sole earning member is a very challenging situation. Such a substantial corpus cannot be self-built by a common middle-class man and a term insurance plan finds application in these cases. By assuring the promise of a lump sum corpus on the event of the sole earning member's death, the term insurance plan takes care of the family's financial stability. Since the Term insurance premiums are the lowest, these can be considered as an investment for buying peace of mind regarding future financial security of the family.
Therefore, through term insurance plans you can provide financial security to your family members provided the life cover taken is adequate.