Do Beneficiaries Pay Taxes on Life Insurance?

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When it comes to tax-saving instruments, the majority of people choose insurance goods. People often regard tax planning to be complex and perplexing. Life insurance premiums paid up to Rs1.5 lakh are excluded from tax deduction under section 80C of the Income Tax Act. According to financial experts, it is not a good idea to blend investments and insurance needs. It is critical to understand how the taxability of life insurance policy payouts works before purchasing an insurance product to utilise as a tax-saving investment.

In order to satisfy tax and savings goals, customers frequently purchase insurance products such as endowment and ULIP plans in a hurry. There are several term insurance tax benefits that you get include on taxes.

Any sum paid as a premium by the insured for life insurance for the spouse, children, or oneself is tax deductible under section 80C of the Income Tax Act. The premium paid by the policyholder for siblings/parents/in-laws, on the other hand, is not tax deductible. Section 80C of the Income Tax Act allows for a tax benefit of up to Rs1.5 lakh. Furthermore, the sum promised is tax-free in the receiver’s hands. However, the insured should keep in mind that the tax benefit is only available once with this policy because you are only investing once. Find out how it works with a term insurance calculator.

The tax advantage is subject to changes in tax laws. The term insurance tax benefits mentioned in the article may not apply if you opt for the new tax regime since many tax exemptions and deductions have been scrapped within the new regime. 

The maturity proceeds, i.e. the sum assured amount on maturity of the policy plus any bonus, are tax-free under section 10(10) D of the Income Tax Act of 1961. Under this clause, if the insured surrenders the policy or if the policyholder dies, the death benefit given to the beneficiary is totally tax-free, subject to certain criteria.

The policy proceeds are taxed for the policyholder in the following scenarios.

  1. If the life insurance policy is issued after April 1, 2003, but before January 31, 2003, the policy proceeds are taxable under section 10(10) D if the premium paid in any year exceeds 20% of the actual sum guaranteed. It has been explained in section 80C(3A) about 10(10)D that the actual sum assured means the least sum assured in all policy years, omitting the bonus amount payable over the assured amount. The actual sum assured should not include any premiums that must be repaid to the policyholder.
  2. If the policy is issued after April 1, 2012, the 20% premium paid limit is reduced to 10%.
  3. Under a life insurance policy, if the policyholder suffers from a serious illness or severe disability, the 10% limit is increased to 15% under the relevant parts of the Income Tax Act if the policy is issued after April 1, 2013. The tax advantage is only available if the handicap is classified as 80U and the critical illness is classified as 80DDB.
  4. The tax advantage is subject to changes in tax laws.
  5. If the premium paid in any year exceeds the designated proportion, i.e. 10%, 15%, or 20% of the actual sum assured, the entire policy proceeds will be taxed in the year of receipt. However, if the policyholder unexpectedly passes away and the beneficiary receives the sum assured amount, the insurance proceeds will be tax-free even if the premium paid in any year exceeds the predetermined percentage of the sum assured.

Because of the benefits, term plans and life insurance policies are more tax advantageous. In general, the sum assured in a term insurance plan is very high and multiples of the annual premium. For example, if you are 30 years old and the policy’s total promised is Rs1 crore, the annual premium will be between Rs6,000 and Rs12,000. There is no maturity advantage with term insurance coverage. 

According to IRDA norms, if a person under the age of 45 purchases a 10-year term life insurance policy, the sum assured will be 10 times the annual premium. As a result, the insured will undoubtedly benefit from the tax break. However, if the buyer is above 45 years old and the policy’s duration is less than ten years, the minimum sum assured will be limited. The insured may forfeit the tax benefit in this instance. Use a term insurance calculator to see your own calculations.

Many insurers offer bespoke term insurance plans in which the insured may select the sum promised. To take advantage of tax benefits, you can set your own sum assured. Opting for single-premium insurance coverage, on the other hand, is the worst option. Single premium insurance policies are commonly referred to as investment plans because they provide a much lower sum assured than term plans. Furthermore, the premiums for these policies are quite costly. As a result, single-premium insurance plans are not eligible for a tax deduction.

Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.