There are several different types of life insurance policies designed to cater to different age groups, insurance coverage requirements, and long-term financial goals. Though all life insurance policies guarantee a death benefit once the insured party dies within the policy term, it is important to choose the right life insurance policy that mitigates risk. There are two main types of life insurance policies; term life insurance and permanent life insurance.
1. Term life insurance policy
A term life insurance policy provides coverage for an agreed period that ranges from 5 to 35 years. The beneficiaries receive death benefits if the insured party dies within the valid policy period. The term policy premium amount is calculated based on a person’s health, age, and lifestyle habits. It is further divided into two life policies; decreasing term and level term. Under decreasing term, the death benefits reduce over the policy’s duration, while they remain constant under the level term policy.
2. Permanent life insurance policy
Permanent life policies are designed to provide death benefit coverage for a lifetime and they hold a cash value component. Cash value is the cash amount offered to policyholders upon cancellation of their life insurance contract. Part of the premium payments goes towards establishing a cash value account. They are subdivided into 3 categories;
a) Traditional whole life insurance
Whole life insurance offers death benefit and a cash value. A part of its premiums is used to fund the cash value. Hence, it tends to be quite expensive because the premiums paid must be sufficient to cater for cash value and maintain the insured death benefit. As the name implies, whole life insurance is a lifetime policy that remains active as long as you pay the agreed premium amounts.
b) Universal life insurance
Just like the whole life policy, universal life policy offers cash value as well. Hence, premiums are divided into service death benefits and cash value. However, universal cover is popular due to its premium flexibility. A policyholder is allowed to change the death benefits and premium amounts at any time without having to take out a new policy.
Additionally, you are allowed to use the accrued cash value to offset premiums. However, this applies to policyholders who have sustained their insurance covers for at least one year and have enough cash value to sustain the policy for 60 days.
c) Variable universal life insurance
A variable universal life insurance cover allows you to invest your cash value in different accounts like mutual funds, bonds, and stocks. For instance, it allows you to adjust premiums and death benefits at any time while investing cash value in your policy’s sub-accounts.
Tax Benefits on Premium
Under section 80C of the Income Tax Act, 1961, tax benefits on life insurance are available to Hindu Undivided Family and individual policyholders. Here is what you should know about life insurance tax benefits.
1. Who can claim tax benefits?
Life insurance tax benefits can be claimed by a spouse or child. As such, the life insurance policy must be bought under the name of a spouse, child or self. Note that you can buy a life insurance policy for all your children irrespective of their age and marital status.
2. What is the maximum tax benefit on premiums?
According to the Indian income tax laws, the maximum amount that attracts tax benefits is INR 15, 00,000. Therefore, even if you make a life insurance investment of more than this amount, you cannot claim additional tax benefits.
3. Is there a minimum lock-in period for life insurance policy to retain tax benefits?
In order to retain claimed tax benefits, a life policyholder must retain the life insurance and pay premiums without fail for a minimum number of years captioned in section 80C of the Indian Income Tax Act, 1961.
In case the life insurance policy is terminated by the insurance provider due to non-payment of premiums or the insured party voluntarily surrenders the policy before the predetermined time limit elapses, the tax benefits are lost. As such, no tax benefits are claimed that year and previously claimed benefits are considered as income and taxed accordingly.
Is your Life Secure?
Life insurance policies may not protect you from calamities or diseases that may affect the quality of your life but they offer the much-needed support when such uncertainties strike. The ideal life insurance policy will help you plan your financial future and secure the future of your loved ones when you are gone. Hence, it is advisable to seek expert advice and examine different policy offers before purchasing life insurance. Go through websites like Coverfox.com to review different life insurance covers and determine the ideal policy in line with your financial goals.