A term insurance policy allows you to save tax on the premiums you pay for the policy. The premium is deductible under Section 80C of the Income Tax Act of 1961. If your tax slab rate is 30%, you can claim a maximum deduction of Rs.1.5 lakhs, which equates to a tax savings of Rs.45,000 per year. The tax benefits mentioned in the article may not apply if you opt for the new tax regime since many tax exemptions and deductions have been scrapped within the new regime. They are also subject to any changes in the law.

While term insurance policies can help you save taxes, they are not their exclusive function. Term insurance policies are designed to provide your family with a financial safety net in the event of your untimely demise. As a result, while purchasing a term insurance plan, you should consider what the plan gives and then use it for its term insurance tax benefits. Avoid making frequent mistakes when purchasing term insurance, as these can be pricey.

Do you want to know what these errors are? Look at this –

Choosing a limited sum ensures

Term insurance plans have very low premiums, letting you choose the optimal coverage for your family in case you lose your life. In reality, the fundamental aim of a term insurance policy is to provide financial security and income replacement. As a result, purchasing a restricted sum assured jeopardises your family’s security.

What are your options?

When purchasing term insurance, always choose the highest possible sum assured. Estimate the amounts required to meet your family’s financial demands, and then select a sum assured that corresponds to the amount. A large sum assured would also help you save more taxes because the premium would be higher, and you would be entitled to a larger deduction.

Expecting the policy to pay off:

Term insurance programmes are not designed to provide a return on investment. Their goal is to build a financial reserve for emergencies. So, if you expect a return on your coverage, you are making a huge error.

What are your options?

You can invest in different avenues created for investment returns, such as endowment plans, money-back plans, ULIPs, and other term plans.

Failure to select an appropriate tenure

Term plan protects against the chance of mortality during the policy’s term. As a result, if you select a limited tenure, your coverage will expire early, leaving you uninsured. Purchasing a new plan at a later age may prove costly.

What are your options?

When purchasing a term insurance policy, choose the longest term possible. This ensures that you are protected till the age of the maximum allowed. Some plans offer lifelong coverage, which extends to 99 or 100 years of age. Choose such alternatives for complete coverage and lifelong coverage. Use a term insurance calculator to get the optimum tenure.

Leaving out add-ons and riders

Riders and add-ons serve to expand the extent of the plan’s coverage. Though they require an additional premium to be added to the policy, the additional cost is quite cheap in comparison to the coverage offered. Ignoring them jeopardises coverage and is a mistake.

What are your options?

Examine the riders that are offered term insurance coverage. Choose suitable riders that provide all-around protection so that you are covered for all eventualities. Furthermore, in many situations, rider premiums provide extra term insurance tax benefits, allowing you to decrease your tax bill even further.

Not comprehending the tax advantages

Finally, the tax advantages afforded by term insurance policies are subject to specific rules and circumstances. Even if you purchase a term plan to save taxes, you may be unable to receive the tax savings if you do not comprehend the underlying terms and conditions.

What are your options?

Learn the intricacies of tax savings while investing in term insurance products. Remember the following:

Premiums are allowable as a deduction. However, they cannot exceed 10% of the chosen sum guaranteed. If the premium exceeds 10% of the total promised, as may occur in a single premium policy, the excess premium will not be recognised as a deduction, even if it is less than Rs.1.5 lakhs.

Assume the total promised is Rs.10 lakhs, and you pay a single premium of Rs.1.25 lakhs to purchase the policy. This premium is greater than 10% of the total assured. As a result, deductions under Section 80C will be limited to Rs.1 lakh, or 10% of the sum assured. In your case, the extra premium of Rs.25,000 will be taxable. A term insurance calculator can help illustrate this better.

If you choose the money-back option, the premiums refunded at maturity would be tax-free in your hands if the premium was up to 10% of the total assured. If the premium was higher than this amount, the refunded premiums would be taxed in your hands.

For example, in the preceding example, because the premium of Rs.1.25 lakhs exceeds 10% of the total assured, it will be taxed when refunded at maturity.

Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.

Source: https://www.avivaindia.com/insurance-guide/buying-term-plan-tax-saving-don%E2%80%99t-make-these-costly-mistakes 

Evelyn Low