What are Some Frequently Asked Questions About Life Insurance Tax Benefits?

Although you can avail of the life insurance tax benefits, these benefits should not be the only reason behind the purchase. Instead, you must consider different aspects of the plan, including the tenure of the life insurance policy you choose, the premium payable, policy inclusions and exclusions, and implications of premium default.

Also Read: Reasons to Buy Life Insurance Policy

The income tax benefit of a life insurance policy depends on different factors, including its type and the premium you pay for it. As per Section 80C, you can avail of a tax deduction for the life insurance premium, up to Rs. 1,50,000 in a year.

The life insurance tax benefits are not limited to the premium you pay during its tenure. As per Section 10(10D), the maturity benefits of a life insurance policy are tax-exempt, provided the premium you pay every year does not exceed 10% (for policy issued after 31st Mar 2012) of the basic sum assured at any point in time during the tenure.

The continuation of a life insurance policy is vital to get the income tax benefits. It means that you cannot skip paying the premiums during the selected policy tenure to save income tax. In case you stop paying the premium of your life insurance policy, your policy is liable for discontinuation, which means you cannot avail of the income tax benefits of life insurance any further and your life insurance benefits may be affected

You can ensure uninterrupted payment of life insurance policy premium by choosing a suitable payment mode. You can either pay the premium either in one go or throughout the policy tenure, on a monthly or annual basis.

Ideally, you should select the sum assured of a life insurance policy based on your financial needs. The sum assured determines the premium you need to pay, which in turn makes you eligible to get the life insurance tax benefits. In other words, the higher the premium, the higher the tax deduction you can avail under the Income Tax Act.

If the premium of your life insurance policy is paid annually and it falls overdue, you get a grace period of up to 30 days (15 days if premium is paid every month). Paying the premium during this period will not risk any of the insurance benefits, including the income tax benefits of life insurance. However, if you fail to pay the premium beyond the grace period, your life insurance policy may become defunct, and you may lose out on the various benefits.

Unit Linked Insurance Plans or ULIPs are one of the most popular types of life insurance policy that offer long-term financial security along with tax benefits. For ULIPs, you get the income tax benefits of life insurance only if you continue paying the premium for at least five years.

If you choose to discontinue the ULIP plan before five years, you are not entitled to claim the income tax deduction in the previous year. Also, the deduction you have already claimed in the preceding years will be considered as your income for the year you terminate the policy.

With the recent amendment in Budget 2021 All ULIP policies issued on or after 1st Feb 2021, with the amount of premium payable in any fiscal year during the policy tenure exceeding Rs 2,50,000 in respect or more than one ULIP will not be eligible for tax exemption.

However, the amount received on death shall remain exempt without any limit on the annual premium.

Also Read: How to Save Tax with ULIPs?