Tax Benefits and Refund Details that You Ought to Know About Term Insurance

It is essential to buy a term plan to provide a financial safety net to your loved ones for the days when you may not be around anymore. The sum assured received helps your family remain financially independent and fulfil any financial goals or obligations – it could be your children’s education or payment of a home loan etc.

But, did you know that term insurance plans are also a great tax-saving tool?

Many people might not tell you term insurance plans come with a lot of tax saving benefits, which make them one of the best life insurance options available in the market. But wait, the tax benefits available under a term insurance plan and moneyback are same. You get identical benefits on both types of insurance plans.

Let's unpack the tax saving benefits available with your Term Life Insurance plan or Moneyback plan.

Benefits under Section 80C of the Income Tax Act

Section 80 C of the Income Tax Act, 1961 allows tax exemption up to Rs.1.5 lakh p.a. on your Term Insurance plan or Moneyback plan.

But, who can avail this benefit?

• Yourself (assesse)
• Your spouse
• Your dependent children

However, there are certain clauses for the deductions:

• In case your term insurance policy is issued on or after April 1, 2012, then tax deduction is applicable only for the total premium amount valued up to 10% of the maximum sum assured.
• In case your term insurance policy is issued on or before March 31, 2012, then tax deduction is applicable only for the total premium amounting to a maximum of 20% of the sum assured.
• In case you are suffering with any disabilities or illness, then tax deduction is applicable if you haven’t paid premiums amounting to 15% or more of the total sum assured. This clause is again applicable for a policy that has been issued on or after April 1, 2013.

Besides, a member of the Hindu Undivided Family (HUF) can also avail the above tax benefits under this section.

You can also claim this tax benefit on any other investments made apart from the life insurance.

Benefits under Section 10 (10D) of the Income Tax Act.

The Section 10 (10D) of the Income Tax Act, 1961 basically offers exemption benefit. Here, any amount received under death benefit for the term plan or moneyback plan and maturity benefit for a moneyback plan, including bonuses if any, is exempted from tax. It is irrelevant whether this amount is received from India or any foreign country.

This clause however won’t be applicable for the below:

• Any amount received under Section 80DD (3) or 80DDA (3).
• If any amount that has been received under the Keyman Insurance Policy.
• Any amount received which is not a part of the death benefit for a policy issued on or after April 1, 2003 but on or before the 31st day of March, 2012. It is also not applicable for exemption if the total premiums paid during the policy period are more than 20% of the total sum assured received.
• In case the term insurance policy is issued on or after April 1, 2012 then the exemption is applicable only if the total premium paid doesn't exceed 10% of the sum assured.

Note:

Under Section 80 DD (3) and 80 DDA (3) if the handicapped dependent predeceases the member paying for his medical treatment and maintenance then such amounts will be treated as income and taxed accordingly.

A Keyman Insurance Policy is nothing but a life insurance policy availed by the company or an employer on its key person’s life who is currently employed by him in the business. The benefit under such policies goes to the company or the employer. There are no special insurance plans for keyman insurance, it is just an application of life insurance to fulfil a special need.

Benefits under Section 80D of the Income Tax Act

Section 80 D of the Income Tax Act, 1961 allows tax benefits on health insurancepremium. So, if your term insurance plan or moneyback plan has an inbuilt or add-on cover in the form of Critical Illness Rider, Surgical Care Rider, Hospital Care Rider, etc. you can avail tax benefits.

But, who can avail this benefit?

• Yourself (assessee)
• Your spouse
• Your dependent children
• Parents (whether dependent or not)

However, there are certain clauses for the deductions:

• The tax deduction can be availed only for an amount not exceeding Rs. 25,000/-
• In case you avail the life insurance policy in your parent’s name, you will be eligible for an additional tax deduction benefit of Rs. 25,000/-.
• You will be eligible for a higher tax benefit of Rs. 30, 000/- in case you avail the life insurance policy in your senior citizen parent's name.

Besides, a member of the Hindu Undivided Family (HUF) can also avail the above tax benefits under this section.

But due to any reason if you are not happy with the term plan that you’ve just bought, you can return the same in the free-look period. Here's how:

Refund Details in Term Plan/Free Look Period

IRDA regulates and creates provisions to establish an environment that is consumer friendly. One of the provisions is a free-look period. Under this provision, if you have purchased a policy and realize you don't agree with any terms and conditions, by all means you can return the policy to the insurer within a specified time frame stating the reason and get a refund. The period for returning the policy is 15 days from the date of the receipt of the policy. If the policy was purchased from distance marketing then the free look period is 30 days from the receipt of the policy.

All you need to do is send a letter informing about the cancellation of the policy mentioning the reason for cancellation along with the original policy document to the insurance company. A refund will be given by the insurance company subject to deduction of the proportionate risk premium for the period on the cover, the expenses incurred on medical examination if any and stamp duty.