What Are Tax Benefits On Term Insurance Riders

Few people may be aware of the many term insurance tax benefits one gets when buying a term life insurance plan. A term plan also serves as a financial safety net for your family in the event of an unfortunate event.  

While the usual benefits of the plan are known, the tax benefits are often overlooked. However, term insurance offers multiple tax benefits to the policyholder that they can benefit from 

Understanding term insurance

Term insurance is a popular type of life insurance policy. In exchange for regular payments in the form of premiums, it provides you with life insurance for a certain tenure.

In case of your demise, the insurance provider would pay your nominees the sum assured as per the policy. When they receive this money, they can use it to care for their needs and pay-off any liabilities in your absence. 

Tax advantages for riders on term insurance: 

A term insurance rider is an add-on benefit that you can avail by simply paying an additional amount of premium. You can choose from several types of riders depending on your needs and the risks you are exposed to. You also get to avail several tax benefits on the term plan riders.

As per Section 80D of the Income Tax Act of 1961, you get a tax benefit annually on the premiums you pay for health insurance policies. If you have a health insurance rider, you may be eligible for tax benefit under this section. You get this benefit since with your term insurance coverage, you have also selected an additional critical illness rider.  

A critical illness rider is a common rider since it offers individual a protection from critical illness like cancer, heart conditions, liver, and other serious health problems. The treatment and recovery of such conditions are expensive and hence, 

An online term insurance calculator can help in evaluating the premium rates as per needs and requirements for affordable financial planning. 

Tax advantages for term insurance: 

Term insurance policies have been eligible for a few term insurance tax benefits under Sections 80C and 10(10D) of the Income Tax Act of 1961 (the Act), subject to their corresponding clauses. Here are some further details: 

Section 80C 

Your premiums during a fiscal year may be deducted from your annual income up to a maximum of Rs. 1.5 lakh per section 80C of the Act. This lowers your overall taxable income, which reduces your general tax obligation. 

Let’s examine an illustration – 

Assume you pay Rs. 8000 per month for a term insurance policy that offers a sum assured of Rs 25 lakhs. You would be required to pay a premium of Rs. 96,000 annually. You can now deduct this sum from your annual income total, which might ultimately lower the amount of tax you owe. 

Paragraph 10 (10D): 

The death benefit paid to your beneficiaries or nominees, on the other hand, is tax-free under Section 10(10D) of the Income Tax Act of 1961. This means that any money your heirs or nominees get from the insurance company due to your passing wouldn’t qualify as income and wouldn’t be subject to tax in their possession. 

Your beneficiaries or nominees are free to use the money they receive completely tax-free, thanks to section 10(10D) rules. However, the sum insured must be at least ten times higher than the amount of the yearly premium you pay for the death benefit to be completely tax-free. 

Here is a brief illustration to help you grasp the idea: 

Let’s say you choose a term insurance policy with an assured 15 lakh rupee death benefit sum. The plan’s annual term insurance premium may cost you Rs. 1,50,000. The death benefit of Rs. 15 lakhs may be entirely tax-free for your beneficiaries or nominees because the total sum assured is ten times that of the annual premium paid.  They can then spend the entire sum that your heirs or nominees receive to fulfil their objectives and needs without worrying about the impact of taxes on such receipts. Alternatively, it’s easy to plan these finances by evaluating your initial premium rates using an online term insurance calculator. Along with the calculator, it is essential that you read the fine print of the policy, to avoid any confusion at the time of claim.