Life insurance for investment and income tax purpose

Nowadays, life insurance is not just a security and investment tool. It has some attractive tax benefits attached to it.

• Under Section 80C of the Income Tax Act, premiums paid on a life insurance policy are deductible from your taxable income up to a limit of Rs. 1,00,000 per annum. However, the amount of premium should not exceed 20% of the sum assured.
• Additionally, under Section 80DD premiums paid on plans exclusively for physically-handicapped people are deductible up to a limit of Rs. 50,000 per annum. In case of a severe disability certified by the proper medical authority, this figure is Rs. 75,000 per annum.
• Under Section 10(10D), any returns received from an insurance policy in the form of death benefits or maturity benefits are tax free. However in case of maturity benefits, the premium within a year should not exceed 20% of the sum assured.

Did you know life insurance is also effective as a retirement planning tool? Let’s now see how effective it is when compared with other retirement planning options.
Retirement policy is basically an Endowment policy, where you are charged for the life insurance term and rest of the money goes into investments. These investments are made in equity and debt securities.
If you decide to opt for a Term policy policy instead of an Endowment policy, you could invest the rest of the amount in PPF ( 8% p.a., very safe) or balanced MF (10%p.a., less risky) or pure equity MF (12%p.a., more risky).
For example, if you are 30 years old and you take an Endowment policy for Rs. 10,00,000, with a term of 20 years, the premium you will pay on it annually would be Rs. 48,140 of which Rs. 2,600 would go towards your insurance and the rest would go towards investment.
Now, let’s see what your returns would have been if you had taken a Term policy instead and invested the rest of the money yourself.

We can see from the table that there are more attractive retirement options available. Life insurance does have its benefits though.

• Your savings happen in a disciplined way as you are forced to save through the term of the policy.
• You don’t need to handle multiple investments simultaneously.

Many companies provide retirement plans like LIC’s Jeevan Anand. Nowadays, you also get several add-ons on basic insurance policies such as:

• Double-accident benefit, wherein the sum assured is doubled in case of death in an accident
• Joint-life policies which cover the lives of two or more individuals
• With-profit plan, wherein you share the profits made by the insurance company

You also have plans tailor-made for specific purposes such as education of your children, your daughter’s marriage or a peaceful retired life.