Even without Sec 80 C, life insurance is a must-have

Rajalakshmi Nirmal | Updated on February 10, 2020

Family life and property insurance concept. Wooden figurines representing family and hand drawing umbrella, symbol of insurance.   -  Getty Images/iStockphoto

A chunk of the insurance market consists of savings/investment products. Though Section 80C benefit is gone with the new tax regime, maturity proceeds under Sec 10 (10 D) still remains exempt from tax

In a Twitter poll, 30 per cent of the 200-plus people who responded to a question on why they buy insurance, said it was for tax benefit. If you also have the same thought, read on.

While it is good to be positive in life and think that you would live 100 years, you should also realise that many things in life are out of one’s control. To make sure that your dependants don’t suffer financial trauma when you are not around, you must buy life insurance. Tax benefits under section 80 C of the Income Tax Act was a carrot to prod people to buy life insurance as an individual who survives the term of life insurance policy doesn’t get any return.

Now, with the Budget proposing lower tax rates for people who do not claim deductions under section 80 C, it makes insurance less attractive. But given the purpose that insurance serves, one should not overlook it.

Also, given that even today, life insurance policies with the saving component are the best avenues for people with low risk appetite to save money, it should not be abandoned. Here are three reasons why you should buy life insurance — as a pure protection cover and also as a savings instrument.

Benefits of term policies

A life insurance policy will provide financial security to your family after you pass away. To repay debt, fund kids’ education and to take care of routine expenses of the family and other requirements, your family will continue to need money even when you are not around. So, with or without tax benefit, life insurance is a must buy for everyone; especially if you are the sole breadwinner in the family.

If you argue that you will invest enough during your life time and that it will be of help to the family when you are not around, the question to mull over is, how big will be your investment kitty and will it take care of all the needs of the family. If you pass away at a young age before the kitty is large enough, the family may have a tough time.

The premium of term policies that are pure-vanilla life covers is cheaper than you imagine. For a 40-year-old male, the annual premium for a policy of sum insured ₹1 crore, comes to only ₹20,000.

So, without worrying over the insurance policy burning a hole in your pocket, you can go ahead and buy one, even if there is going to be no tax benefit. Note that unlike other investments, in life insurance, you can ensure that the proceeds, on your death, are not attached by courts for claims from banks or other creditors.

While signing up for the life insurance policy itself if you take it under the Married Women’s Property Act, you can make sure that on your death, your wife gets the full proceeds.

Advantages in savings plans

Maturity proceeds still exempt from tax.

Over 70 per cent of the insurance market today consists of savings/investment products. The new tax regime doesn’t take out benefits under section 10 (10 D) that exempts from tax the maturity proceeds in insurance plans. So, benefit amount from all money back plans and other traditional insurance products as also ULIPs on maturity would be tax-free in the hands of the recipient. However, the only condition that the sum insured in the life insurance policy should be at least 10 times the premium to avail of the benefit under section 10 (10 D), still applies.

Assured long-term returns

If you are a long-term investor and looking for assured returns, insurance plans are among the few options in the market today. Without much complication or paper work, it lets the investor pay premium for 5/10/15 or say ‘n’ number of years that’s the saving period, and take maturity proceeds at the end of the term with some returns.

Traditional investment plans in insurance are of two types — participating and non-participating. Participating plans are ones that get a share of the profits of the company that is declared as bonus. The returns here depend on the performance of the company. In non-participating plans, there is an upfront returns guarantee. Most plans in this category today give a return of 4-5 per cent. Given that this return is not taxed, it is comparative to 7 per cent return in FDs where the post-tax return will work out to 5 per cent assuming that it is an individual in the 30 per cent tax bracket. In FDs, there is the pain of having to re-invest each deposit when it matures. Not many banks offer FDs for a term over 10 years.

In PPF (Public Provident Fund), under the new tax regime, contributions to the fund will lose benefits under Section 80 C, but the interest amount as also the maturity proceeds will continue to be tax exempt. The interest is an attractive 7.9 per cent now. However, note that this interest will be reset every quarter. In the long run, as interest rates may come down, you can’t be sure how much will be in your kitty at the end of 15-20 years. Also, in PPF, the amount you can invest every year is capped at ₹1,50,000. In insurance plans, there is no such cap.

Debt MFs are also an option for long-term investment and can deliver far higher returns than a traditional insurance savings plan or PPF, but there is market risk attached.

Published on February 10, 2020

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