When you buy a life insurance policy, you put money away to protect your family’s future. A life insurance policy gives a lump sum to the policyholder’s chosen beneficiary if the insured passes away before the plan matures. When you buy this kind of policy, you want your family to be as financially secure as possible. This is why life insurance is a smart way to invest your money.
Have you been worried about the tax your nominee will need to pay on life insurance? Well, you will be happy to know the Income Tax Act of 1961 allows for life insurance tax benefits on the money received from a life insurance policy.
Why is a life insurance policy necessary?
Your passing could cause financial hardship for your loved ones if you were the only provider for the family or even if you provided some financial contribution. If you are a homemaker, you still make non-financial contributions to the family’s requirements. Your family will have to foot the bill for additional help while you are away. Life insurance coverage aids in meeting all of these financial needs.
It would be best if you had a life insurance policy to ensure that your dependents will not be financially burdened in your absence. A life insurance policy makes it easier for your loved ones to take care of their regular expenses and reach their goals in life without experiencing too much financial hardship.
To decide the right amount of coverage needed to protect your family and to ensure all their goals are met in your absence, you can use a life insurance calculator to make an approximation.
The process of life insurance
The fundamental principle of life insurance is to provide financial protection to the nominee in the event of the covered person’s passing. The policyholder’s life is the asset insured in a life insurance policy. Here’s a closer look at the function of life insurance policies.
Consider a scenario where you are 25 years old, and the life insurance policy you buy offers a sum assured of Rs. 1 crore for a tenure of 45 years. This indicates that your life insurance policy would remain effective until you turn 70 years old. If you pay your premiums on time and per the terms and conditions of the policy, the life insurance company will pay your nominee the sum of Rs. 1 crore in the terrible event of your passing during this time. The company will terminate the policy after the nominee receives the amount.
The life insurance payment would only be paid when the insured breaths his last before the policy term ends. As a result, the policyholder cannot receive the money. For this reason, while purchasing a life insurance policy, the insured needs to nominate someone to receive the money. After filing a claim, the benefits can be paid to this nominee.
You can designate your loved ones as beneficiaries, or the court can assign one.
Do nominees have to pay taxes?
Anyone purchasing a life insurance policy frequently inquires, “Do beneficiaries have to pay taxes?” Under the Income Tax Act of 1961, a life insurance plan provides incredible life insurance tax benefits. There are multiple tax deductions to help reduce the beneficiaries’ tax liability.
1. Section 80C Benefits
You can claim a tax deduction for the money you spend on your insurance policy’s premiums under Section 80C of the Income Tax Act of 1961. The maximum tax advantage can be 1.5 lakh INR. Both individuals and members of the Hindu Undivided Family (HUF) are eligible to receive the benefits.
The maximum tax advantage is 10% of the sum assured if the premium value is over 10% of the sum assured. This has been in effect since April 1, 2012. Before that, the upper limit was 20% of the sum assured.
2. Section 10 Benefits (10D)
According to this provision, the policyholder’s nominee is eligible to receive the entire sum assured without paying taxes. The tax exemption under Section 10 has no upper limit (10D).
Thus, the nominees of the life insurance plan may have to pay taxes depending on the terms and conditions. Tax benefits are subject to change in prevailing tax laws.
Certain life insurance tax benefits are only applicable for people paying taxes under the old tax regime. Taxpayers under the new tax regime may not be able to enjoy certain tax benefits mentioned here.
Wrapping it up, a life insurance policy can ensure financial stability during misfortunate events. You’ll have more confidence if you know how much coverage to purchase for your loved ones. A life insurance calculator would help you determine the amount to put into a life insurance plan, considering all your life goals
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.