Buying a term plan for tax saving?

Don’t make these costly mistakes

A term insurance plan helps you save tax on the premium that you pay towards the policy. The premium is allowed as a deduction under Section 80C of the Income Tax Act, 1961. You can claim a maximum deduction of Rs.1.5 lakhs which converts to a tax saving of Rs.45,000 if your tax slab rate is 30%.

While term insurance plans do help you save taxes, their only purpose is not tax saving. Term insurance plans are meant to provide a financial safety net to your family in the case of your untimely demise. As such, when you are buying a term insurance plan, you should be mindful of what the plan offers and then use it for its tax saving benefits. Steer clear of some common mistakes in buying term insurance as these mistakes might prove costly.

 

Wondering what these mistakes are?

Have a look –

• Opting for a limited sum assured

A term plan has very low premiums allowing you to opt for an optimal coverage that would provide sufficient funds to your family in your absence. In fact, the whole purpose of a term insurance policy is financial protection and income replacement. As such, if you buy a limited sum assured, you jeopardize your family’s security.

What should you do?

Always opt for an optimal sum assured when buying term insurance. Estimate the funds that would take care of your family’s financial needs and then choose a sum assured that matches the amount. A high sum assured would also help you save more taxes since the premium would be higher and would give you a higher deduction.

 

• Expecting a return from the policy

Term insurance plans are not meant to deliver returns on your investment. Their objective is to create a financial corpus for emergencies. So, if you are expecting a return from the policy, you are making a big mistake.

What should you do?

Invest in a term plan only for financial security. For investment returns consider investing in avenues that are designed for the same like endowment plans, money back plans, ULIPs, fixed deposits, etc.

 

• Not choosing an optimal tenure

Term plans cover the risk of death during the policy tenure. So, if you choose a limited tenure, the coverage would expire early leaving you uninsured. Buying a new plan at a later age might prove expensive.

What should you do?

Opt for the maximum possible tenure when buying a term insurance policy. This would ensure that you get covered up to the maximum possible age. Some plans have the option of lifelong coverage, i.e. up to 99 or 100 years of age. Choose such options to enjoy lifelong coverage and complete protection.

 

• Ignoring Add-ons and riders

Add-ons and Riders help in enhancing the scope of coverage of the plan. Though an additional premium is needed for adding them to the policy, the added expense is very low compared to the coverage provided. Ignoring them compromises on the coverage and is a mistake.

What should you do?

Check the riders available with term insurance plans. Choose suitable riders that provide an all-round protection so that you can be insured against all possible contingencies. What’s more, in many cases, the rider premiums also allow additional tax benefits which help you to reduce your tax outgo further.

 

• Not understanding the tax saving benefits

Lastly, the tax benefits provided under term insurance plans have certain terms and conditions associated with them. Even if you buy a term plan for saving tax, if you do not understand the underlying terms and conditions, you might not be able to claim the tax benefits.

What should you do?

Understand the finer details of tax saving when investing in term insurance plans. Here are the terms that you should keep in mind –

• Though premiums are allowed as a deduction, they should not be more than 10% of the chosen sum assured. If the premium is more than 10% of the sum assured, which might happen in a single premium policy, the excess premium would not be allowed as a deduction even if it is within the limit of Rs.1.5 lakhs.
  For instance, say the sum assured is Rs.10 lakhs and you pay a single premium of Rs.1.25 lakhs to buy the policy. This premium exceeds 10% of the sum assured. As such, deduction under Section 80C would be available only up to Rs.1 lakh, i.e. 10% of the sum assured. The excess premium of Rs.25,000 would be taxable in your hands.
• If you have opted for the return of premium option, the premiums refunded on maturity would be tax-exempt in your hands only if the premium was up to 10% of the sum assured. If the premium exceeded this limit, the refunded premiums would be taxed in your hands.
  For instance, in the above-mentioned example, since the premium of Rs.1.25 lakhs exceeds 10% of the sum assured, it would be taxed when it is refunded on maturity.

 

So, avoid these mistakes in buying a term insurance plan. These prove costly and also affect your coverage. So, be a smart investor and buy the right plan for your coverage needs.

 

AN Feb 31/22

 

 

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