Meaning of Life Insurance
Life insurance is a protection against financial loss that would result from the premature death of an insured person. The named beneficiary or nominee receives the proceeds and is thereby safeguarded from the financial impact of the death of the insured.
Meaning of various features of life insurance
A life insurance policy has some distinct features which are as follows:
Sum Assured – This is the amount of life coverage which the lifeinsurance plan provides in lieu of the premium you pay. This is the amount which your nominee will receive in case of your unfortunate death. The choice of the sum assured rests with you (policyholder) and the insurance company decides whether to accept your chosen life cover. It depends mainly on your income, age, occupation and risk profile.
Tenure – Also known as policy term, this is the period or number of years for which the life insurance company undertakes the risk on your life. You can choose tenuresuitable to you but is subject to acceptance by the life insurance company.
Premium – In lieu of the life cover provided by the life insurance company, you need to pay premium. Premiums are always payable in advance. The rate of premium is calculated based on your age,gender, sum assured or life coveramount, the premium paying frequency, the chosen insurance plan and the term of the policy.
Premium paying frequency – Premiums are usually calculated on an annual basis, but you might choose to pay premiums in monthly, quarterly, half-yearly or annual modes. Insurance companies generally offer some discounts if the premiums are paid annually. Premium can be paid through cheques, cash, online using your bank account or debit or credit cards and through ECS mode.
Entry and exit age – Every life insurance plan has a specified entry and exit age. The entry age has a minimum and a maximum limit and specifies the minimum and maximum age criteria for availing your chosen insurance plan. Exit age also has a minimum and a maximum limit and specifies the maximum age beyond which the policy couldn’t continue.
Benefits – Every life insurance policy has a compulsory benefit – that is called ‘death benefit (except Immediate Annuity Plans). Apart from pure term insurance plans, every life insurance plan has a maturity benefit too! While the death benefit is payable to your nominee on the event of your death, the maturity benefitsare payable if the chosen plan term completes and you are alive at that time.Under Money Back insurance plans, there is also a concept of paying survival benefits which accruesand paid periodically during the plan termif the insured is alive on that date.
Traditional life insurance plans, if issued as participating plans earn bonuses. Bonus is a part of the profits earned by the life insurance company by investing the accumulated premiums. Since the returns are generated on the premiums paid by policyholders, a certain portion of the profit is paid back as bonus to the policy holders.
Life Insurance Tax Benefits
Section 80Cof the Income Tax Act 1961–Under this section rebate can be availed for the premiums paid for buying a life insurance plan with an overall limit of Rs150,000 (Rupees One Lakh and Fifty Thousand only) which includes investment in PPF, Mutual Fund ELSS schemes, EPF and Bank tax saving Fixed deposits etc.
Section 80CCC – Section 80CCCwas introduced to encourage investors to invest in pension funds to secure their retirement years. This section provides for income tax deduction for contribution to pension funds. The aggregate amount of deduction of this section along with Section 80C is limited to Rs 150,000 (Rupees one Lakh and Fifty Thousand) in a financial year.
Section 10(10)D of the Income Tax Act 1961 – Similarly, the amount of sum assured along with bonus paid on maturity or surrender of the policy or the claim amount paid to the nominee on the death of the policy holder is completely tax freeunder Section 10(10D) of the Income Tax Act 1961.
Section 80D – Section 80D allows for the deduction for money spent on paying your health insurance premium and assumes great significance in your tax planning. If you family falls in ‘below age 60’ group then you can get a maximum deduction of Rs 25,000 and if your parents are aged 60 or above, maximum deduction claimed is Rs 30,000. Based on these assumptions, therefore, a maximum exemption that can be claimed under Section 80D is upto Rs 55,000.
Therefore, we can conclude that a maximum life insurance tax benefit of Rs. 54,075 can be availed by you in a financial year. It is calculated at highest tax slab rate of 30.9% (including Cess) on insurance premium of Rs 1,50,000 U/S 80C/80CCC (Tax benefit Rs 46,350) and health premium of Rs 25,000 U/S 80D (Tax benefit Rs 7,725) of the Income Tax Act, 1961