Authored by Dhirendra Mahyavanshi

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Life is seldom binary in nature. The impact of most things is not simply good or bad. What this means is that there are things to learn from every good or bad experience. The pandemic has made us all question our future and potential wellbeing. It has led to many of us questioning our mortality and taking steps to secure the future of our dependants and family members. While life insurance is a term that all of us have heard in some context or the other, it gained additional significance in the backdrop of the pandemic. However, life insurance does not only protect your family’s future, it also helps you augment your income by reducing your tax outgo.

What exactly is life insurance?

Life insurance is a legal contract between two parties, i.e., between the insurance company and the policyholder. It simply helps the policyholder optimally manage risk. The insured pays an amount, called the premium, to the insurance company in exchange for providing this protection. You can count on life insurance to secure your dependents financially from an unexpected and untimely loss. In an unfortunate circumstance, if a policyholder expires during the term, the family of the deceased will be financially compensated by the insurance company. While life insurance does not compensate for your loss, it does enable your family to remain financially secure.

Dual Benefit of Life Insurance

Life insurance does not only insure your life but also contributes to your continued well-being. There are two main benefits of a life insurance policy.

Protection: Life insurance enables you to plan for your family’s future in the event of untimely death. You can help your family recover and rebuild their lives even after you are gone, enabling you to be a part of their lives, moving forward. Your legacy will live on even when you are gone. This benefit of a life insurance policy is well known. An equally important, however lesser-known benefit, is the role it can play in helping you reduce your tax outgo.

Income augmentation through tax benefits: Not only does life insurance secure your dependents’ future, but it also permits you to lower your tax outflow. Besides the protection you receive under life insurance, you can also avail of tax benefits of up to Rs. 1.5 lakh, which can be claimed as a tax-saving deduction under Section 80C of the Income Tax Act, 1961. The silver lining is that while you are investing for your family’s security, you can also avail the benefit of saving tax on your hard-earned income. In accordance with section 80C (5), if you surrender your policy voluntarily, or the policy gets terminated within 2 years from commencement, then you will not receive any benefits on the premium paid, offered under section 80C of the Income Tax Act.

Additionally, under Section 10(10D) of the Income Tax Act, the nominee can gain tax-free access to the assured amount plus bonus (if any), paid on surrender or maturity of the policy, or in case of the death of the insured. Some of the important points of section 10(10D) of tax deductions are:

All amounts accessed by the nominee, under life insurance policies, is applicable for a tax deduction.

Gains and proceeds from a ULIP can also avail deductions under Section 10(10D).

The tax-free benefit on maturity proceeds can be availed when the premium is paid towards the policy is less than 10 percent of the sum assured amount.

All of us are looking for ways to lower our tax outflows and life insurance offers us the option of securing our future while also locking down gains at present. Indeed, life insurance is one of the most effective tax planning tools available as you receive additional tax benefits on your premium payments under Section 80C. The investments you make have the potential to grow and fortify your future while limiting your tax expenditure. The money saved from the tax deductions can be allocated to other investments that can help you achieve your financial goals. From that perspective, a life insurance policy will not only protect the future of your family but can also protect your future.

Dhirendra Mahyavanshi is Co-Founder at Turtlemint -- an InsurTech Company

First Published:Jan 30, 2021 11:35 AM IST