Term life insurance is a contractual agreement between a policy buyer and an insurance provider. In the said arrangement, the policy buyer pays a premium to the insurance provider in exchange for a premium (lump sum amount of money), which is paid out after a fixed tenure or in the event of an insured event, such as untimely death or accidents. Over the years, term life insurance plans have gained popularity as an effective means to mobilize small savings and create a financial safety net for the future. However, to ensure one makes the most of a term insurance policy it is crucial to be familiar with the key benefits of the plan. Having an idea about what to expect from an insurance plan will help individuals to plan their means of financial safety and savings accordingly.
In this article, let’s discuss the key benefits of a term life insurance policy and how it can aid in tax savings.
Top Benefits of Term Life Insurance Policy
A term insurance policyholder accompanies several features and benefits. However, these are some of the most popular benefits that help policy buyers to develop a better financial approach.
- Risk Cover: Life is unpredictable, and unforeseen events can lead to financial crises. Term life insurance provides financial assistance to the insured’s family in the form of a sum assured in the event of his/her unexpected death or accident. By offering financial support, a term plan helps cushion the impact on the family’s financial condition during challenging times.
- Plans for Different Stages of Life: Term insurance plan not only offer financial aid in case of the insured’s untimely and accidental death but also serve as a long-term investment instrument. For instance, traditional insurance plans, such as endowment plans, offer maturity benefits along with guaranteed returns, allowing individuals to plan goals like buying a home and funding children’s higher education. It also encourages them to help plan retirement and achieve financial milestones that are tailored to different life stages.
- Income via Annuities: Life insurance plans are proven to be efficient instruments for retirement planning. By facilitating savings over time, these insurance plans offer guaranteed income post-retirement. Some life insurance policies even offer personalized pension plans to policyholders that provide a steady income at regular intervals, ensuring they lead a comfortable lifestyle even post-retirement.
- Cover for Rising Health Expenses: Most life insurance companies offer financial protection against chronic illnesses and hospitalization expenses through standalone plans or riders. Given the escalating cost of medical treatments, it is crucial for individuals to invest in health insurance plans, which can help them avail necessary medical treatments without depleting their savings.
- Facilitates Savings: Life insurance plans require regular payments over a fixed tenure, promoting a disciplined approach towards savings. Consistent saving over time enables policy buyers to build a robust corpus that can help them meet their long-term financial goals. In turn, regular contribution toward insurance plans helps develop a disciplined approach toward savings.
- Loan Facility: Life insurance policies can serve as collateral for raising loans in case of emergencies. Various insurance providers allow policyholders to borrow money against the paid premiums of their insurance policies. This often proves to be a cheaper and less cumbersome alternative than bank loans. However, such a facility is often subject to specific terms and conditions.
- Mortgage Payment: Life insurance can serve as a safety net that even proves useful in covering debts and mortgages. In the event of the insured’s untimely demise, the policy beneficiaries can use the insurance proceeds to pay off outstanding debts. This ensures that the bereaved family members are not burdened with financial liabilities and can continue to lead their daily lifestyle without draining their savings. However, individuals should always make it a point to get their term policy from an insurance provider that has a high claim settlement ratio. This will increase the probability of getting their future claims approved and settled and ensure positive results in their favor.
Besides these benefits, life insurance policies also accompany tax advantages that help individuals save on taxes and lower their financial liabilities.
Tax Advantages of Life Insurance Policies
Life insurance policies offer several tax benefits, allowing policyholders to save a significant amount of money that they would otherwise end up paying as taxes. This makes it useful to understand the tax treatment to effectively make the most of such benefits.
Here’s how life insurance plans are treated under the Income Tax of India Act, 1961.
- Tax Deduction under Section 80C: Premiums paid for life insurance policies taken out in the name of parents, self, children (both minor or adult,) or spouse are eligible for a tax deduction under Section 80C of ITA. However, the insurance premium should not exceed 10% of the sum assured from insurance policies that were issued after 1st April 2012.
- Tax Deduction under Section 10(10D): If the insurance premium amount paid by the policyholder is less than 10% of the actual sum assured for all insurance policies issued after the 1st April 2012, the maturity amount received at the end of the tenure is exempted from taxes under Section 10(10D). Notably, for insurance policies purchased before 1st April 2012, policyholders can claim tax deductions on the premium amount they paid, provided the sum does not exceed 20% of the actual sum assured.
By availing of these particular tax benefits, individuals can effectively save on their taxes and build a robust corpus over the years without affecting their financial stability. Such benefits further allow individuals to plan their income taxes efficiently and maximize the utility of their insurance policies beyond coverage.
This emphasizes that term life insurance plans offer numerous benefits, including risk coverage, long-term investment opportunities, and protection against rising health expenses. In addition to these, the insurance policy also helps to mobilize savings for the future and the tax advantages accompanying term insurance plans further enhance the value and utility of the cover. Regardless, it is crucial to choose a competent insurance provider to ensure one actually benefits from these features and more during the course of the policy term.
