Insurance Facts which you must know


January -February -March , popularly known as JFM  are the crucial months for the insurance industry due to tax saving season . Lot many investors rush to buy tax saving products and fall prey to insurance agents ,distributors and buy the insurance policies without understanding its tax implication .

Here we are jotting down the changes which has happened in last 5 years in insurance sector and its implications on policy holders .

  1. The Finance Act, 2012, had made it mandatory for policy issuance, effective April 2012, that the sum assured should be 10 times the annualised  premiums for the life insurance policies to enjoy the tax benefits on contributions under Section 80C and on maturity under Section 10 (10D). The earlier limit was five times for policy issuance ( from April 2003 to March 2012 ).
  2. If the insurance cover is less than the minimum amount specified in point no 1, the amount that can be claimed for tax savings under Section 80C reduces proportionately. For example, if you buy an insurance policy today with life cover of five times, the amount that can be claimed under 80C will be only Rs. 50,000 for Rs. 1 lakh premium paid. But you will not get any tax benefits on maturity under Section 10 ( 10D ) . The life cover has to be at least 10 times the premium for it to be tax free. 
  3. We were surprised to see why some investors putting lakhs in Single premium products like LIC Bima Bachat .Are these investors under the impression that they can just show the returns from the products as tax-free?” . Most of the investors were told that maturity proceeds are tax free. When we requested them to check with their agents , most of them replied  with comment ” all insurance proceeds are tax free”.
  4. The Finance Act, 2014, has introduced a 2% TDS (tax deduction at sources ) on the maturity, surrender or partial withdrawal amount of life insurance policy, if it does not qualify for tax-free returns clause of 10(10D). If the PAN ( permanent account number ) cards details are not available, the deduction will be 20%. This new section 194DA of the Income Tax Act, 1961, that took effect on 1 October 2014, envisages TDS on life insurance policy payouts which are not exempt under section 10 (10D)
  5. Pension / retirement plans are easily among the worst financial products with respect to taxation. If you surrender a pension products anytime before maturity, you will have to give back the tax deduction you had claimed under Section 80CCC. The surrender value has to be added to your income and taxed as per your slab in the year of surrender.
  6. At the time of maturity of Pension policies , you have an option to withdraw one-third amount which is tax free and balance amount gets converted into annuity ,which is again taxable.( Refer our blog Retirement Plan or Plan for retirement ….Think over it )

There is the ‘insurance for investment’ myth. The very idea of insurance is to protect you from the risk of loss, damage or casualty. Insurance is worth dying for. However, for living, you require investment solution.

We ,at Pentagraph , always advise that insurance and investment should be kept separate. 


Happy Investing !!!!!