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Life Insurance

Accumulation / Payout Stage

i. Tax deductions on Payouts of a Life Insurance Policy under Section 10(10D)

 

Life insurance payouts (sum assured/coverage) received as a death benefit to the nominee or on maturity as a survival benefit to the insured, including bonuses if any is exempted from tax under Section 10 (10D) of the Income Tax Act, 1961.

 

Payouts are not tax exempted under the following cases:

  1. Life Insurance issued on or after 1st April 2003 but on or before 31st March 2012: Payouts received are not tax exempted, except as a death benefit, for any policy issued on or after 1st April 2003 but on or before the 31st March 2012.
  2. Life Insurance issued on or after 1st April 2012: If life insurance policy is issued on or after 1st April 2012 then the exemption is applicable only if the total premium paid doesn't exceed 10% of the sum assured.
  3. Maximum limit on Life Insurance premiums: If the total premiums paid during the policy period are more than 20% of the total sum assured received.

Note that monies received on surrender of a traditional policy or a ULIP can be taxable/ tax-free subject to certain conditions.

 

TDS applicability on payments / bonus recd from life insurance policy 

 

Policy proceeds exempted under section 10(10D) will be given to the insured without TDS (Tax Deduction at Source). Even if these proceeds are taxable as per section 10(10D) but do not exceed Rs 100,000/- then also no TDS is to be deducted by the insurer when making the payment to the insured.

 

As per section 194DA of the Income Tax Act, 1961, any sum received by an insured Indian resident from an insurer under a life insurance policy shall be subject to TDS @ 2% if the said sum is not exempted under section 10(10D). 

 

Things To Do On Your Life Insurance Policy's Anniversary:

The first insurance policy bought by individuals is usually a compulsive tax saving tool or is a result of word-of-mouth information from close relatives or friends. Seldom, thought is given to serious financial planning, factoring in inflationary pressures or lifecycle changes. Given the lack of awareness, this is not only true in most cases for first-time buyers, but also turns out to be a general trend among the regular customers.

 

Having said that, there are avenues to rectify or modify decisions by reviewing your need. The best time to analyse one’s needs and financial dynamics revolving around lifestyle is during the policy’s anniversary.

 

You should follow and implement eight points given below when you are closer to the policy anniversary to be benefitted by the flexibility that comes with insurance products.

 

i. Lifestyle changes

One should factor in the changes in one’s life and lifestyle while renewing a policy. 

If there is marriage on the cards around the policy anniversary, it is important to check if your spouse has life cover. If your spouse is an earning member, you will have to calculate a combined human life value (HLV), the expected lifetime earnings of an individual and change the cover accordingly.

Conversely, if someone is going through a divorce that may reduce the number of dependents, a decrease in cover is advisable. You must also revisit the nomination in both the situations.

The birth of a child is the most joyous phase of one’s life. However, it also brings with it concerns about the future needs of the child. With increasing education costs, it is imperative for parents to build a corpus to plan for key milestones in a child’s life. 

Successful professional years translate into higher incomes, which may be a good indication to consider increasing your insurance cover. With the increase in cash flow, you may also need to boost the sum assured of your insurance policy, according to your present net worth.

However, if you lose a job or run into losses, you may want to check if your policy provides flexibility of premium payment at a later date or whether you have an option to stagger the premium payment. 

There is always a choice of enhancing one’s cover or investing in policies that factor in inflationary dynamics. For instance, in a term plan, one can hedge against the rising cost of living with an option of increasing the sum assured. One can also add riders, if needed, to their existing policies for higher protection margin.

One may also invest additional amounts to their regular ULIP policy premiums (called top-up). Anytime during the policy term one can invest these additional premiums through top-ups. 

 

ii. Payment options

One should revisit payment options to bring in more flexibility to the policy. One can always rework the various processes of payment such as visiting the branch, online payment and electronic fund transfers. 

In your busy schedule while you are juggling with multiple tasks, remembering due dates for policy premium payments can be quite a stress. Switching to an automated ECS facility or even linking to your credit card can be some effective options.

 

iii. Changes or new tax rules  

The Union budget usually has an impact on individuals and their finances. It is important that customers speak to financial planners after every budget announcement to understand their existing portfolio and watch out for the changes in tax norms before making any future purchases. 

 

iv. Rising medical costs

Given that health-care expenditure is rapidly increasing every year, families may want to reconsider or rework their health cover according to lifestyle changes and expenses incurred. This is a good time to add to the health cover if it does not match the changing cost scenario. 

In the case where a dependant has met with a serious ailment which has strong chances of recurrence, options to increase the medical cover may become limited. In situations like these, one can consider buying a unit-linked health plan which may not require any medical tests and will hedge against future expenses. 

 

v. Loan plans

Plan your partial withdrawals and loans in advance. Usually most insurance companies offer products that provide customers an option to get a loan on their policies. One should decide the minimum and maximum withdrawal limit, corpus goals and interest rates offered by the company. 

 

vi. Service experience

The tools and services available now can help customers manage their policies more comfortably. You should evaluate the need for various services and tools introduced by your insurance company while renewing your policy.

 

vii. Keeping tabs

Before purchasing an insurance plan, one must study the service efficiencies of a company, especially in the areas of claims settlement or investment performance. 

Even on an ongoing basis, it would be a good practice to review information on important service parameters of your insurance company to understand the overall efficacy. This will help when it is time to reap the benefit or when a bereaved applies for the cover/claim. 

 

viii. Inform the nominee 

Keep your nominees informed about your financial decisions. All precautions you have taken to fill up the proposal form can be meaningless if you fail to inform your nominees about the whereabouts of your policy documents. Some people refrain from telling the nominees about the policy either out of a feeling of insecurity or ignorance.

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Units 32/35