LIFE INSURANCE: SHOULD INCOME TAX BENEFIT BE A KEY OR ADDITIONAL REASON?

The 2023 Union Budget announcement in India rekindled the discussion on the financial benefits of investing in life insurance products, particularly the significance of tax benefits on such investments. In India, many individuals continue to view life insurance as a tax-saving instrument, using the premium amount to offset a portion of their yearly tax obligation.

The emphasis on the new income tax regime in India, which offers reduced tax rates but eliminates most exemptions and deductions that taxpayers previously enjoyed under the old regime, including tax relief on life insurance premiums, has sparked concerns that it may discourage individuals from purchasing life insurance. As a result, individuals who stand to benefit from the financial protection provided by life insurance coverage may be deterred from seeking it.

Conversely, the proposal to tax maturities of non-ULIP life insurance products with an annual premium of Rs. 5 lakhs and above, purchased on or after April 2023, has resulted in a likely pre-booking of high-ticket non-ULIP policies in February and March 2023 to dodge the impact of taxation. However, adopting a limited approach by only considering tax benefits for a financial product as crucial as life insurance can pose several risks.

Also Read: Last minute tax saving investment options to maximize your tax savings

When considering the value proposition of life insurance, it is common for tax-paying individuals to primarily consider the policy’s tax-saving benefits. This inclination towards tax mitigation can create a compelling incentive to view life insurance as a tax-saving instrument, resulting in a myopic view of life insurance. This tax-saving-induced buying behavior often arises from a lack of in-depth knowledge and understanding of life insurance products.

Tax benefits should not overshadow the importance of ensuring that the coverage acquired is adequate, affordable, and tailored to one’s unique financial circumstances and objectives. Ignoring the primary objective of life insurance—providing financial protection—may result in an incorrect assessment of the adequacy and suitability of the coverage acquired, which may compromise the financial security of one’s dependents.

Despite purchasing life insurance, a lack of careful evaluation of the adequacy of the sum assured can result in the policyholder being underinsured. This can lead to not just economic instability but also significant financial repercussions for the policyholder’s family in the event of an unexpected crisis, defeating the very purpose of buying life insurance.

On the other hand, it can also result in paying a higher premium and potentially lead to missing out on the benefits of a better-suited policy. Therefore, it is imperative to exercise due diligence and evaluate all aspects of a life insurance policy before making a purchase, rather than relying solely on the lure of tax-saving benefits.

Looking beyond tax: What to consider while purchasing life insurance?

The purpose of saving through life insurance is to ensure a financial shield for the family in the form of life cover. When it comes to purchasing life insurance, it is therefore essential to look beyond tax-saving benefits and evaluate the policy’s adequacy in terms of providing a financial shield to the policyholder’s beneficiaries in the event of their untimely demise.

The sum assured acts as a vital safety net that the policyholder’s family can rely on in the event of their untimely demise. The Economic Survey 20231 revealed that households in India remain exposed to a significant financing gap in the event of the premature death of the primary breadwinner, underscoring the importance of adequate life insurance coverage. To ensure that the policy’s sum assured aligns with one’s financial needs, it is necessary to evaluate the amount of cover required.

A simple rule of thumb is to opt for a life cover that amounts to at least ten times the primary breadwinner’s annual income. However, this may vary depending on individual circumstances such as the number of dependents, existing liabilities, income, and lifestyle. Careful consideration of these factors can help determine the adequate sum assured needed to cover daily living expenses and crucial financial goals, if any, such as a children’s education.

Next, individuals must carefully evaluate the policy tenure, or the duration for which the beneficiaries will receive financial cover. The tenure should be sufficient to see the policyholder’s loved ones through their financial obligations. It becomes important to consider crucial financial goals as well as the policyholder’s financial responsibilities while selecting the policy tenure.

In addition to these important factors, it always pays to assess the additional benefits or riders offered by the life insurance policy. These riders provide an extra layer of protection against unforeseen events and risks. For instance, a critical illness cover provides a lump sum amount in case the policyholder is diagnosed with a critical illness, while a waiver of premium rider ensures that the policy remains in force even if the policyholder is unable to pay the premiums due to a disability or critical illness.

The real purpose of life insurance: Ensuring financial security for your loved ones

The importance of having a life insurance policy cannot be overstated, as it serves as a crucial tool in securing the financial future of your loved ones. Tax benefits serve only as a complimentary value-add; they do not define the primary purpose of a life insurance product.

By prioritizing protection over tax benefits, individuals can provide their loved ones with economic stability in the future and peace of mind in the present. Therefore, it becomes essential to view life insurance as an integral and indispensable part of one’s financial plan.

(By Vaibhav Kumar, SVP & Head – Product Management, Max Life Insurance. Views are personal)

2024-03-30T10:41:24Z dg43tfdfdgfd