Tax Planning Series II – Tax Planning and Life Insurance
24th Jan, 2013
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In our first article in this series (Tax Planning Series I – Deductions under Income Tax Act) we spoke about the various tax rebates you can avail under different sections of the Income Tax Act. However, investors should not just buy insurance without giving it much thought apart from saving tax. There are many types of life insurance products in the market and careful planning as to what insurance policy you require would go a long way in adequately securing you and creating wealth over long term.
Term Insurance Policy: Term insurance is the purest form of insurance. The policy will be in force for a particular term (say 30 years or up to age of 75) and then comes to an end. During the time policy is in force, insured pay every year a fixed money to insurance company called as premium and if during this time if insured dies, the insurance company pays sum assured to the family of the insured. In case the insured survives the period of insurance, the policy terminates and nothing is payable to the insured. Hence term insurance products offer only risk cover without any returns or any maturity value. These policies are relatively very cheaper as compared to traditional insurance products and cater to the specific needs of an individual, i.e., to cover the risk of death.
Whole life Policy: Whole life policy is a product that covers the policy holder against death throughout life and the sum assured is paid only at the death of policy holder to its beneficiary. The policy is ideal for individuals who would like to create an estate for their heirs.
Traditional Endowment Policies: Traditional endowment policies are among the most popular policies among life insurance investor. These policies combine risk cover with investment. These policies are designed in such a way that if policy holder dies before the maturity of the scheme, the beneficiary gets the sum assured and if policy holder survives the entire tenure of the scheme he gets the total premium paid till date as well as certain interest over the premium paid in the form of bonus. The money is typically invested in fixed income instrument. The policy is ideal for individuals who are looking for risk cover as well as investing the money in a conservative manner with minimum guaranteed return.
Money Back Policy: These policies are designed to give periodic cash flow to policy holder during the term of the policy. The policy is structured in such a way that policy holder receives certain portion of the sum assured at regular intervals and the balanced sum assured at maturity if he survives the entire tenure. If policy holder dies before the maturity if the scheme, the beneficiary receives the full sum assured. A money back policy is ideal for individuals who are looking at periodic cash flows to meet their financial goals like children education, house renovation etc.
Unit Linked Insurance Plan: ULIPS are similar to endowment insurance which link insurance and investment together, however the decision of investment in different asset class rest with individual policy holder. These products provide the flexibility to policy holder to choose from variety of fund option depending upon individual risk appetite and return expectation. The dual offering of protection and long-term wealth creation through mix of equity and debt makes unit linked products an attractive investment proposition for long term goals. However, it should be noted that to make a profit with ULIPs, investors must be prepared to invest for the long term, with a minimum investment period of at least 10-15 years.
Children Plans: These policies are similar to ULIPS but are specially designed to meet children’s future needs like education, marriage etc. These policies pay a lump sum amount on child attaining certain age/milestone. Normally these plans offer insurance in the name of parents and if the parents die before the maturity of the policy, the remaining premiums are paid by the insurance company.
Annuities/Pension Products: Pension products are designed to provide regular periodic installments to policy holder during his retirement for certain time period or till his death. In this policy, the policy holder pays fixed premium in his earning days or pays lump sum of money at the outset and once he retires/ or attain certain age receives regular cash flows from insurance company in the form of annuity. The annuity received during his time period is added to individual income and taxed as per marginal tax bracket. The policies are ideal for individuals looking for regular cash flows during their retirement for themselves or his dependent.
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