Life insurance is a great way to ensure that the financial health of your loved ones is secure in your absence. While there are different types of life insurance out there, term insurance is an ideal choice for many. Term insurance is a type of life insurance that provides you with a life cover for a limited period. It usually offers a high sum coverage for low premiums.
Before buying a term plan, it is important to know its tax implications and refund policies. Knowing these components ensures you make an informed decision when you buy a term policy.
Refund details of a term plan
As an individual, you can cancel your term plan whenever you wish. You can also claim a refund of your term plan if you are eligible. This is where the free-lock duration comes into the picture. A free-look duration is a period created for customers that helps them in deciding whether they want to continue with their term insurance or not. It is like a time that the insurance company gives you to think about before canceling your policy.
If you wish to continue after the free-lock period, the insurer will work on alternatives with you. However, if you still wish to cancel and get a refund, the same can be done immediately by submitting a cancellation form. You can submit the cancellation form online or at any nearest branch of your insurance company. Once you have submitted the cancellation form, they process your request within a couple of days. Before cancellation, ensure that you have all the details of your insurance policy and an active bank amount to receive the refunds.
Tax implications of a term policy
Term insurance is a tax-saving financial instrument. It can help you in saving taxes while providing you with a life cover. Use a term plan calculator to further determine the premiums and tax benefits on your term plan. Here are different tax provisions through which you can get different benefits from your term plan.
Tax deductions under 80C of the Income Tax Act
Several tax-paying individuals avail the tax benefits of section 80C of the Income Tax Act. This section provides tax benefits for various investments and expenditures. It offers tax deductions of up to Rs.1,50,000 annually from the taxable income of an individual. Under this section, the premiums that you pay on your term insurance are also exempt from taxes. Here are some requirements that an individual needs to meet to get term insurance tax benefits:
- The annual premium of your term insurance should not be over 10% of your sum covered. If the premium is over 10%, the deductions are then distributed proportionally.
- If they had issued your policy before 31st of March,2012, the deduction is applicable only if the annual premium does not exceed over 20% of the sum covered.
Also, if you cancel your term insurance or surrender it involuntarily, you will not get any tax benefits of section 80C on the payments of the premiums.
Tax benefits under section 80D of the Income Tax Act
Section 80D of the Income Tax Act is specific to health insurance only. However, the tax benefits under this section can be claimed by certain types of term insurances too. If you have selected term insurance with health-related riders, that part of your term plan will be eligible for deduction under this section. Health-related riders are critical illness riders, hospital care riders, or surgery care riders.
Here’s the eligibility for gaining tax benefits under section 80D-
- You can claim deductions under this section if your sum of health rider does not exceed Rs.25,000
- You can additionally claim a deduction of Rs.25,000 if you have also taken health-related insurance for your parents.
- The deduction limit exceeds Rs.50,000 if your parents are senior citizens.
Tax advantage under section 10 (10D) of the Income Tax Act
According to section 10 (10D) of the Income Tax Act, the sum cover that you received at the surrender or maturity of your term plan is exempt from taxes. This means that in an unforeseen demise of the policyholder, the sum cover that the nominee receives is exempt from any taxes. You can claim the tax benefits of term insurance under this section if the premium of your term plan is less than 10% of the sum assured. Or else, the sum cover needs to be at least ten times the amount of premium.