The main reason why most of us invest and at least buy a life insurance policy is simply to save tax on our income. Currently, we can escape tax for investments made up to Rs 1 lakh under Sections 80C, 80CCC and 80CCD. For those who fall in the standard 30% tax slab can also save Rs 30,900 by investing in just different life insurance products with tax-saving instruments.
Never buy insurance with other motives
To begin with life insurance should never be brought with just tax saving perspective. In the interest of earning money or gaining returns or just to save tax – do not buy an insurance. You must understand that insurance is for the worst case scenario. It is to support and make sure your family or dependents do not have any financial problems in your absence. Once you are clear with a right idea of buying an insurance, now let us see the tax saving investments scheme with different types of life Insurance.
How is life insurance policy eligible for tax exemption?
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| image credits:economictimes.indiatimes.com |
You can buy a life insurance in three forms which include the likes of Unit-linked plans, Money back plans or term plans. You can get a tax exemption for at least 10 times the annual premium within the Rs 1 lakh limit. Even the profits generated from endowment plans or ULIPs are not taxed. However, there is a lock-in period of at least five years. Premiums paid for pension plans from life insurance companies are eligible for tax deduction.
Traditional Endowment Plans
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These are today the most popular or the policies in a limelight for the real world audience or people who buy policies offline. In a country like India where predominantly the emphasis is on savings, Endowment plans not only offer life cover but also give guaranteed returns of at least more than 5 percent but with a lock-in period of five years.
The premiums are little higher and also you might not get adequate cover. This plan is mostly suited for someone who is the age of 35 and married and has kids and would not like to take too many risks with their investments. Simply, because this plan offers a decent return and it is expected that a person at 35 is having some financial stability with some assets.
You can check out the likes of SBI Life Smart Power Insurance, Kotak Premier Endowment Plan and Reliance Endowment Plan etc.
Unit-Linked Plans
If you are looking for an insurance plan with returns almost at the rate of fixed deposits or even higher than ULIPs are the best bet. These plans offer life cover, invest in equities, secured instruments or both. This means if you want life cover and good returns, you can ask the fund manager to invest in equity and if you are the risk averse then you can expect a fixed deposit like rate of return with investments in debt instruments. Again the charges are high, initially the fund manager charges, fund allocation charges are also high. In fact for example out of a premium of 10,000 only 6,000 goes for investments, the rest is deducted as charges. So if the investments do well you will get good returns, else even an average performance will not give you more returns. A premium of 10,000 would hardly you give you a cover of just 1 lakh.
This is mostly suited for someone who is willing to put huge money but not take a risk. The high premiums will require huge money to cover life and for investing.
You can choose from the likes of LIC Profit Plus, Tata AIA Life and MetLife etc.
Term Plans
Term plans are no frills insurance and only give your life cover but at a very low cost. For example, you can cover your life up to 1 crore for a premium of just under 10,000 if you are aged up to 30. Provided your health is good and you are a non-smoker. The downfall is there is no return of premium if the policyholder survives till the maturity date.
This policy will suit the young generation who do not have much money but will cover their families from risk in case of any untoward incident. A best part is the premium does not change much and remains same until there is some increase in tax etc.
You can choose from the likes of AEGON Religare iTerm Plan, LIC e-Term and SBI eShield etc.
As you see, the tax saving is the same for all the three types of life insurance but you must know the right policy for you. The first priority must be to buy the right policy and then see how much tax you can save and not the other way round. Just think of the consequence once you are not there with your family or dependents and think how they will live their life without you before you buy a policy.
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