Do you have an insurance policy in your portfolio? If not, then you’ve probably not realised the necessity of having these policies to ensure your family’s future financial security. Life coverage is a must for everyone, mainly if you are the only breadwinner or among the primary earners of your family. Do you want to see a day when your family sinks financially due to your unfortunate demise? Absolutely not, right? You should thus look up the various types of life insurance and finalise the ones you feel fits your needs.
Let us look at the same along with the necessity of possessing life insurance, along with the Government’s new regulations related to life insurance taxes and proceeds. There has been some confusion regarding these regulations, and it is essential that they are cleared up amidst the onset of the new financial year.
Life Insurance Types: The Basics You Should Know
Term insurance is basic life coverage in return for a premium. The insurance company pays a fixed sum assured to your nominee in the case of your unfortunate demise within the policy tenure. There are no other maturity benefits in case you outlive the policy period.
There are also term insurance plans with the return of premium facility. In these plans, the insurance company returns the premium paid at the time of the conclusion of the policy in case the insured survives this period. The amount paid is returned after deducting GST and other applicable charges. This incentivises those starting term insurance plans early in life and seeking some accompanying maturity benefits.
You may also choose other forms of life coverage, including unit-linked insurances plans (ULIPs). These combine life coverage with investments in market-linked securities for building a future corpus to achieve specific objectives. Other types of life insurance include child plans, endowment plans, and even retirement plans, to name a few.
Now that you have an idea about the available life insurances plans that you can choose from, what about the necessity of life insurance? Here are some points worth noting in this regard.
- Financial protection for your family in case of your untoward and sudden demise within the policy period
- Your family can use this money to meet lifestyle costs, future goals, and even debt repayment obligations
- You can beat stress knowing that your family is financially secure for life
- There are attractive tax deductions up to Rs. 1.5 lakh on life insurance premium payments under Section 80C. You can also maximise your tax benefits by adding health-related policy riders. This will give you further deductions under Section 80D. The amount received at maturity is tax-free under Section 10 (10D), subject to specific terms and conditions.
New Government Regulations For Life Insurance Proceeds
Here are some key points that you should note about the new Government regulations relating to life insurance proceeds and taxability in the new financial year.
- The Union Budget 2023 has introduced a new regulation, as announced by the Union Finance Minister, Nirmala Sitharaman.
- This has future implications for life insurance payouts/proceeds and their taxability with effect from the 1st of April, 2023.
- This regulation states that any policies with annual premiums of more than Rs. 5 lakh will have their maturity proceeds taxed.
- Other life insurance policies with annual premiums below this threshold will not be taxed under this rule.
- The Union Finance Minister has already stated that taxability will be applicable for policy proceeds where the aggregate of premium (other than ULIPs) issued on or after 1st April exceeds Rs. 5 lakh.
- Payouts resulting from death claims will continue to be fully tax exempted, irrespective of the premium amount or other factors.
- This new regulation will also not impact those policies that have been issued till the 31st of March, 2023.
ULIPs have already seen their tax rules revised in the Union Budget 2022. The Finance Minister had unveiled the new law where proceeds from these plans would only be taxable if the annual premium exceeded Rs. 2.5 lakh. Hence, the takeaway for you is that ULIP proceeds and other life insurance proceeds will only be tax-exempted if their annual premiums are less than Rs. 2.5 lakh and Rs. 5 lakh, respectively.
These regulations pertaining to ULIPs and other life insurance plans have been introduced for a specific purpose. The objective of the Government is the elimination of any misuse of such exemptions by HNWIs (high net-worth individuals). They often invest in these policies with sizeable contributions toward premiums and then get exemptions on the maturity proceeds accordingly. You should make a note of the new measures and plan your insurance investments accordingly for the new financial year.