The Ultimate Guide on Term Insurance and Tax Savings
Easy on your pocket, a term insurance plan offers dual benefits for policyholders - protection and tax savings at the same time.
If you already have insurance, ask yourself if the cover is adequate to help your family sustain the same lifestyle after you are gone? If not, then you are underinsured. Just like most Indians are.
Traditionally, Unit Linked Insurance Plans (ULIPs) and endowment plans have been quite popular with the investors seeking insurance. In both types of plans, one part of the premium is used to provide life cover and the other part is used to make investment. The value of investment generally increases over the time. There are also tax benefits available. So, people get the best of all worlds – insurance, investment and savings.
But, if you are looking for a pure protection plan with bigger life cover and without any investment element, term insurance can fulfil your need. The basic principle of term insurance is to provide total financial protection to your dependents in case of your unfortunate demise. If you don’t have enough insurance, it wouldn’t compensate the loss of income that your family will have to bear in your absence. Term insurance can address this financial gap to a significant extent.
What is Term Insurance?
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Larger life coverage: The entire amount you pay towards premiums goes towards covering your life risk. It is not invested anywhere in the banks or market. So, you get higher cover.
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Affordable premium: Since there is no investment component in a term insurance plan, the premium is quite cheap. You can get a life cover of Rs. 1 crore at a premium of Rs. 20 per day!
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Peace of mind: As a breadwinner of the family, you can ensure a steady flow of income for your family after your demise. Your child’s education will not get interrupted, his or marriage expenses can be met, and any outstanding loans can be repaid.
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Tax Benefits: The tax benefits on a term insurance policy are at par with the other types of policies. You get dual benefit – protection as well as tax savings.
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The premium amount up to Rs. 1,50,000 is exempted under section 80C.
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The death benefit that nominees receive is also fully exempted under section 10 (10D). So, your family gets the complete life cover you apply for.
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As per the Income Tax Act, insurance policies issued on or after April 1, 2012, get a tax deduction limited to 10% of the total sum assured. A person suffering from any illness listed under section 80DDB or suffers from a disability listed under section 80U, and then above 10% tax deduction limit would be increased to 15%. These benefits are also extended to term insurance.
5. Lower Claim Rejection: According to the current IRDA norms, any insurance company cannot deny the claim if your policy is more than three years old. The policy stands the risk of rejection in the first three years only if you have misrepresented or not disclosed any information. So, when you take a term plan, do make sure to present the correct facts about your personal details, lifestyle and health.
When is the Right Time to Buy Term Insurance?
Earlier the better! At a young age, you can get larger cover at a lower premium because you are at the pink of health.
Which Factors to Consider Before Buying Term Insurance?
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The life cover should be at least 15-20 times your current income.
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The policy duration should cover until the retirement age.
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The riders such as critical illness, accident cover and disability should be taken only if genuinely required.
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Market reputation of the insurance company.
Look beyond the psychological factor of earning income while buying an insurance plan. If you haven’t bought any kind of insurance yet, term insurance should be your first choice. If you have, make sure term insurance is definitely included in your overall insurance portfolio.
Aegon Life understands that every individual has different needs and priorities in life. Hence, it offers different types of term insurance plans that can be tailored to your protection needs.
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First Published: Nov 16 2017 | 5:10 PM IST
