Life Insurance Tax Benefits
The investment in Life Insurance is not primarily for the purpose of getting returns on the investment but it is for the cover against unfortunate eventuality that may arise. It is not for the benefit of the person who passes away but it is to guard his family/dependents against the events that could affect them in the unfortunate circumstance of his / her demise.
- The premium paid by an individual for life insurance of self or spouse or any child of such individual and the same by a Hindu Undivided Family for life insurance of any member is eligible for deduction from income under section 80C of the Income Tax Act.
- Contributions made to pensions plans like Jeevan Akshay and Jeevan Dhara schemes are eligible for deduction from income under section 80C of the Income Tax Act.
- The premium/amount paid to keep in force a contract for a notified annuity plan in the case of an individual or any two children is also eligible for relief under section 80C of the Income Tax Act.
- Contribution to LIC's Jeevan Suraksha (Pension Scheme) is eligible for deduction from income under section 80CCC of the Income Tax Act.
- The sum received (including the bonus) under a life insurance policy (other than any sum received under sub-section (3) of section 80DDA is totally tax free. However, in following case the amount received is taxable:
- Sum received under a Keyman Insurance policy.
- Sum received under an insurance policy issued on or after 1.04.2003 and upto 31.03.2012, in respect of which the premium paid for any of the years is in excess of 20% of the sum assured.
- Sum received under an insurance policy issued on or after 1.04.2012 in respect of which the premium paid for any of the years is in excess of 10% of the sum assured.
- Sum received under an insurance policy issued on or after 1.04.2013, on life of a person suffering with disability/severe disability referred u/s 80U or a desease / ailment specified u/s 80DDB in respect of which the premium paid for any of the years is in excess of 15% of the sum assured.
- Sum received under a policy for maintenance of handicapped dependent u/s 80DD.
- Pension / annuity received by policy holders under Jeevan Akshay / Jeevan Dhara schemes is taxable in the year of receipt under the head 'Income from Other Sources'.
Types of Life Insurance Policies:
An endowment policy covers risk for a specified period. Endowment life insurance pays the face value of the policy to the beneficiary on death of the insured person. If nothing unfortunate happens, at the end of the specified period the sum assured is paid back to the policy holder along with the accumulated bonus.
Endowment policy can be described as an instrument of accumulating capital and a protection against the investor's premature death.
Money Back Policy
Money back also covers risk for a specified period. This type of policy provides periodic payments to the policy holder during the currency of the policy and the balance of the survival amount with accumulated bonus at the expiry of the term of the policy. In case of unfortunate death of the policy holder during the term of the policy, the face value of the policy is paid to the beneficiaries without making any deduction for the periodic payments made to the policy holder during his life time.
Whole Life Policies
A whole life policy runs as long as the policy holder is alive usually requiring the payment of premiums throughout the life. The insured amount and the bonus is payable only to the beneficiary upon the death of the policy holder. There is no survival benefit as the policy holder is not entitled to any money during his / her own lifetime.
Term Life Policies
These policies are for a specified term but usually without any survival benefits. Therefore, the premium on this type of policies is lower than Endowment or Money back policies. The insured amount is payable to the beneficiary in case of death of the insured person during the term of the policy. No survival benefit is available on expiry of the term of the policy to the policy holder.
Joint Life Policies
These policies are similar to endowment policies and offer maturity benefits to the policy holders apart from covering the risks. The Joint Life policies cover two lives simultaneously and offer unique advantage to a married couple or to partners in a business firm. The sum assured is payable on the first death and again on the death of the survivor during the term of the policy. The sum assured alongwith accumulated bonus is also paid after the death of the survivor. If one or both the policy holders survive to the maturity date, the sum assured as well as the accumulated bonuses are payable on the maturity date. The premiums payable cease on the first death or on the expiry of the policy term, whichever is earlier.
Group Insurance Policies
The Group Insurance policies offer life cover to a group of persons. These policies are no survival benefit policies and are usually issued at very low premiums.
An annuity is an investment that is made either in a single lump sum payment or through installments paid over a certain number of years, in return for a specific sum that is received every year, every half-year or every month, either for life or for a fixed number of years.
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