Along with the pure risk cover through term insurance, insurance companies also offer investment options through endowment insurance plans.
Life insurance is primarily meant for transferring the life risk to a insurance company, which is financially healthier than the life assured to compensate the nominee in case of untimely death of the insured person. Apart from the risk of early death, life insurance companies generally cover the risk of living too long – beyond a person’s financial capacity to sustain – by providing pension plans as well.
Along with the pure risk cover through term insurance, insurance companies also offer investment options through endowment insurance plans, where not only death benefits, but the insured person gets maturity benefits also on surviving the term of the insurance plan.
Although such insurance plans offer lower return than other pure investment plans, but many people buy endowment plans to save taxes. However, before taking an insurance plan for availing tax benefits, you should ensure that the sum assured of the insurance plan is 10 times or more than the annual premium. Because, as per Section 10(10d) of the Income Tax Act, the premium and maturity amount would be tax free only if the sum assured is at least 10 times the annual premium. This makes single-premium plans as well as may limited-premium plans ineligible for getting tax benefits.
Now, insurance companies want the provisions under Section 10(10d) to get relaxed, so that even limited-premium as well as single-premium plans get some tax benefits.
“Current provision under section 10 (10d) is that the maturity proceeds from life insurance shall be liable to tax if the sum assured under the contract is lower than 10 times the premium. The provision does not differentiate between a regular premium paying policy, a limited premium paying policy and a single premium paying policy. It will be more appropriate to align this with the IRDA Product regulations, which define the minimum sum assured at a lower multiple of premium,” said Sunil Sharma, Chief Actuary & Chief Risk Officer, Kotak Life Insurance.
Advocating for making pension plans more tax efficient, Sharma also said, “Retirement benefit in India is a very critical benefit for elderly people. It is important that government incentivise investments in long term savings in pension by having an explicit investment in pension products. This could be on Exempt-Exempt-Tax (EET) mechanism. This is likely to ensure retiring people in the future do not have to depend upon the resources from exchequer post-retirement.”