Is Insurance a Good Way to Save Taxes?

This post is about a delicate topic, often discussed amongst friends, colleagues and relatives — Insurance. It’s a difficult topic in my view, as it is not just about returns on investment. It’s about a sense of security for the individual and the dependents. The choice is not driven by money, so one has to be sensitive to the potential outcomes. So we will try not to persuade you as the reader in a specific direction, rather present factual information about the different type of products that are available in the market and how it affects your tax planning.

Term Life Insurance

Term life insurance as the term suggests is an insurance policy for a pre-defined length of time to protect the insured’s family primarily against the sudden demise of the insured. It is only insurance without any cash benefits unless the untoward incident happens during the term. It is a functional policy that does its job of securing your dependents with no strings attached.

The premium paid under the term insurance policy is eligible for deduction under the 80C section of the Income Tax act. Please bear in mind, insurance decisions are not investment decisions, so it’s important to look at insurance from a more extreme situation. The advantage of a term insurance policy is that premiums are much lower.

Whole Life Insurance

Again as the term suggests, it is valid until the end of the insured’s life span with an assured cash payout after the insured’s demise. It’s a traditional plan, which our parents and grandparents are well aware of. The main advantage is the assured cash payment, but of course it comes with a much higher premium.

It is up to the situation of the family, both economically and structurally which may make this an attractive option. The premiums are eligible for deduction under section 80C, much like the term plan.

Unit Linked Insurance Plans (ULIP)

A highly controversial topic, hence we will not discuss the merits and demerits much. This product (ULIP) is a combination of a term life and an investment fund. The Insurance company you insure with, will allot a part of the premium to life insurance and a part to investing in other instruments. It is a subject of debate whether this is better off than going for a separate term life and a mutual fund.

Again, we would suggest you do what makes your financial plan tick. If you have a ULIP, there may be logic continuing. If you are yet to get one, please ask the adviser/agent detailed calculations and make a choice accordingly. There are enough agents in the market trying to paint a rosy picture. Most ULIPs are deductible under 80C, so they do qualify as tax saver but from the perspective of investment they fare poorly due to high costs to the investor.

Endowment Insurance Plans

Okay, this one is in the middle of everything we just described. An endowment policy will pay the dependents on the sudden demise during the policy tenure. What’s more, they assure a payment even if the insured does not die after the policy period expires. So one is assured the payout on their own insurance. Technically some ULIPs are endowment plans as well.

Like other insurance plans, the premium paid are deductible under the 80C section. One may find the concept of endowment plans attractive but please do your math before jumping in. There may be better options, of course depends on the nature of your spends and your economic goals.

Insurance and 80C Deductions

As per current tax laws, life insurance premiums upto 1.5 lacs are eligible under Section 80C subject to other investments falling under Section 80C adds up to a total of Rs. 1.5 lakhs.

Also take note that only insurance policies having life cover are eligible for tax deductions. ULIP products which are sold as Pension plans are not tax exempted.

Conclusion

The sense of security is probably in the driving seat compared to returns when one thinks of insurance. Rightly so. Your financial planner should appreciate this emotion and give you the right guidance. No one answer is correct and will differ person to person, family to family.

We would strongly recommend to question, increase awareness and make the choices that make you sleep sound at night.

This article is the third in a 5-article series on ‘Guide to Saving Income Tax Legally’.

In this series, we will discuss everything from investment options which help save income tax to striking the right balance between different tax saving options.

Read previous articles:

What Investments can Help You Save Income Tax Legally?

PPF, EPF or FD — Which is Better for Tax Planning?

Arjun Balakrishnan is an investment fanatic who loves writing about investment topics. He regularly writes at Investment Gyaan.