One of the many reasons people buy insurance products is because this helps them save on tax. Besides tax savings, Life Insurance products such as Endowment Plans and ULIPs are also investment tools that help create wealth over the long term.
Since we’re approaching the end of the financial year and looking to save on tax, let’s take a look at two options – Life Insurance and Health Insurance. Let’s also understand how much tax you can save through these options and what returns insurance products provide if used for investment.
Saving Taxes Under Section 80 C – Life Insurance
This is one of the most significant sections of the Income Tax Act, allowing you to save up to Rs. 1.5 lakh in taxes. You can invest this sum in a combination of Life Insurance premium, Public Provident Fund, Employee Provident Fund, National Savings Certificates, Sukanya Samriddhi Scheme, tax-saving Fixed Deposits, principal payments on Home Loan, and ELSS Mutual Funds. The combination of payments made up to Rs. 1.5 lakh can be claimed as a tax deduction under Section 80 C.
If you’re looking to buy Life Insurance, you can avail one or all of these many options:
- Endowment Plan: This product combines Life Insurance and investments. It is for a fixed period, typically 20 to 30 years. Upon maturity, the survivor gets a lump sum, which is an aggregate of returns earned on his premium payments and bonuses paid. In case of the insured’s death, his nominee gets the sum assured along with any returns generated. As an investment option, endowment plans provide a conservative rate of return of around 5-6% per annum.
- Whole Life Policy: Unlike other forms of Life Insurance which have a fixed term or maturity date, a whole life policy can continue till the insured person’s death at any age, as long as premiums are being paid regularly. Upon the person’s death, the sum assured is paid out. If the insured survives, the premium paid along with returns earned and bonuses paid are aggregated and paid out. Like endowment plans, whole life policies generate conservative returns.
- Cash Back Policy: This policy has similarities with endowment plans. But the major difference here is that a percentage of the sum assured is paid back to the insured at fixed intervals – for example, once every four years. It is a way for the insured to get income out of his insurance plan and maintain liquidity. Upon the maturity of the policy, the insured doesn’t get the full sum assured as it has already been paid out to him in instalments. But upon death, the full sum assured is paid out.
- ULIPs: Unit Linked Insurance Plans provide a life cover along with the option of market-linked returns. The insured’s premiums are invested in the equity or debt market, thus allowing conservative or aggressive returns, depending on the insured’s risk appetite. The long-term returns from ULIPs are generally higher than other insurance options, but the investment is also subject to market risks.
- Term Insurance: This should be your go-to product in case you have dependants. Term plans are plain insurance products that can cover the long-term finances of your dependants in case of your demise. There is no maturity value; only a death benefit. A term plan can be boosted with several riders such as income option, accidental death cover, disability income, etc.
Additional Reading: Insurance Covers To Buy When You’re Young & Single
Saving Taxes Under Section 80 D – Health Insurance
The premiums you pay for buying Health Insurance for yourself, spouse, dependant children, and parents can be claimed as tax deductions under Section 80 D. The deductions claimed are subject to terms and conditions.
If you, your spouse, and your children are below the age of 60, you can claim up to Rs. 25,000 in a year. If anyone’s above 60, your deduction rises to Rs. 30,000 along with an additional Rs. 5000 for costs of preventive health check-ups.
Secondly, you can claim Rs. 25,000 for your parents if both are under the age of 60, and Rs. 30,000 plus Rs. 5,000 for health checks if either one of them is above the age of 60.
Thirdly, you have the option of claiming up to Rs. 30,000 towards healthcare costs if you, your spouse, or parents do not have Health Insurance and are above the age of 80.
There are broadly three kinds of Health Insurance plans you can buy and claim tax deductions for:
- Individual Health Plans: These plans cover the cost of hospitalisation and associated medical expenses. They come with a variety of add-ons.
- Family Floater Plans: These cover several members of a family under a common health plan. The benefits of the plan such as the sum assured are available to members either fully or up to a fixed percentage. Family floaters can be a great way to save on premium costs by covering the entire family in one plan.
- Critical Illness Plans: The treatment costs of critical illnesses such as cancer are significant. So, critical illness plans pay out a lump sum upon the insured being diagnosed with any critical illness listed in the plan, subject to terms and conditions. The policy expires after the payment.
Want to know more about Life and Health Insurance? Go on and click on the link below.