Tax benefits surrounding Life InsuranceInvestment into Insurance Policies can get us a lot of tax benefits in addition to the life protection, but are we aware of the conditions pertaining to claiming tax benefits? let us see how this works.
21 May 2010
A policeman stopped a person who was about to jump from the bridge. Obviously policeman stopped him and wanted to know the reason for this drastic step. The person trying to commit suicide informed that he was an insurance advisor and took nearly fifteen minutes to explain that why life is not worth living. Suddenly crowd gathered to see both the policeman and the Insurance Advisor jumping from the bridge together. This is the power of persuasion of an insurance advisor.
A lot of people are persuaded to buy an insurance policy without fully understanding the suitability of the policy for them. Thus it is important that you should ensure, before buying an insurance policy, so that it works best for you always and particularly when you are looking at tax benefits. However there are certain measures you need to ensure once you have taken the policy.
There are two pronged benefits on insurance policies. Firstly by way of a deduction under Section 80 C upto Rs. One lac in respect of premium paid on life insurance policy, secondly, on the money received from insurance company with accumulated bonus which is tax free under Section 10 (10D).
There are certain fine points you need to take note of while claiming tax benefits.
You are entitled for tax benefits for premium paid only if the insurance policy covers your life, your spouse's and child's life. As a parent you can claim the income tax benefit on the premium paid on the life of your child even though the child is not dependent on you. But if you pay insurance premium on the life of your dependent parent, then you cannot claim the benefit of Section 80 C.
What is the maximum limit for claiming tax benefit in relation to premium paid?
In case you pay more than 20% as premium of your sum assured, for any of the years during the term of the policy then tax benefit under 80C is not available. I will illustrate here with an example: Say you have taken an insurance policy for a sum assured of Rs. One lac and yearly premium in respect of this policy is Rs. 21,000, then the deduction in respect of the entire premium paid will not be available for deduction under Section 80C.
Now let us look at the tax aspects of the monies received. Any money received in respect of Life Insurance policy together with the accumulated bonus is exempt fully from income tax under Section 10(10D) presently.
However, money received on your insurance policy together with accumulated bonus in respect of life insurance policy issued after 1st April, 2003, will be fully taxable if the amount of premium payable on the policy is more than twenty percent of sum assured for any of the years during the term of the policy as explained above.
But any money received on death of the person insured will be tax free though the premium for any of the year might have been more than 20% of the sum assured of the insurance policy.
But you are entitled for all these benefits only if your policy is not terminated before premium in respect of two years has been paid. Moreover as a policy holder you should not allow the policy to lapse by reason of failure to pay the insurance premium before premiums in respect of two years has been paid. Whereas for ULIPs, the policy should remain in force for at least five years and should not either be terminated or allowed to be lapsed for failure to pay premium.
It is important to know that either in case of Life Insurance policies or ULIPs, if the policy is terminated or allowed to be lapsed, then aggregate of all the deductions allowed in earlier years, will be added to the income of the year in which such policy is terminated or allowed to get lapsed for non-payment.
This way you see that by properly studying your policy will not only benefit your heirs but also benefit you big time while claiming tax benefits. But the essence of this is that you ensure proper and timely payment of your premiums to reap the real fruits of your harvest.