Strategic Financial Planning: Why Buying Life Insurance is Crucial for Tax Efficiency

While most consumers purchase life insurance plans to protect against mortality risks and financially secure their loved ones in case of personal emergencies, they can also be strategically utilised tax planning and create a tax-free corpus for future needs. Different products such as term and life insurance plans, savings-based life insurance solutions and Unit Linked Insurance plans (ULIPs) offer varied tax-saving benefits, deeming it necessary for potential investors to carefully assess each product before purchasing them.

What’s more, it is important that policyholders estimate their insurance needs based on their future earning potential, making sure to purchase tax-efficient life insurance plans that can provide dependents with sizeable death benefits to cover their future financial expenses. Let us look at how life insurance solutions can be used for tax optimization and explore the range of benefits available for both individuals as well as businesses.

Maximize your income by investing in Life insurance

For the working-age population, efficient financial planning hinges upon their ability to increase savings and channelize them into investment instruments that can provide inflation-beating returns in the long run. Towards this end, it is important to reduce income tax outgoings by utilizing deductions and exemptions offered under the Income Tax Act, 1961 on various expenditures, savings and investments in a particular financial year.

In this context, life insurance plans are particularly effective, providing deductions on premium payments and exemptions on maturity proceeds. Under Section 80C of the Income Tax Act, 1961, individuals can claim deduction up to ₹1.5 lakhs on life insurance premium payments to secure themselves, spouse or their children, as long as the total payment made on insurance policy does not exceed 10% of the actual capital sum assured for policies issued on or after 1st April 2012 and 20% for policies issued on or before the 31st day of March, 2012.

Further, one must hold the life insurance policy and pay the premiums regularly in order to retain the tax benefit claimed. Similarly, under Section 10(10D) of the Income Tax Act, 1961, money received under the life insurance policy is exempt subject to fulfilling the conditions prescribed therein. This includes the amount received due to bonuses dished out by the insurance company. Further, death benefits are tax-free as per section 10(10D) of the Income Tax Act, 1961. Thus, investors can achieve efficient tax planning at different stages in life, demonstrating the versatility of life insurance plans in strategic financial planning.

Enjoy low-risk wealth-creation opportunities

Even though investments in mutual funds and government schemes such as the Public Provident Fund (PPF), National Pension Scheme (NPS) etc also fall under the ₹1.5 lakh deduction limit under Section 80C, life insurance products such as moneyback and endowment plans are more suitable for investors looking to generate stable and low-risk returns on their investments. These plans provide a life cover and the opportunity to earn guaranteed returns that is stated at the time of policy purchase, without any linkage to market related fluctuations. Investors can choose to pay premiums on a monthly, half-yearly or yearly basis and receive a lump sum maturity benefit or regular income till the end of the tenure period. For investors with a higher risk appetite, ULIPs are another option that offer similar benefits but with the potential to generate higher returns on the invested portion of paid premiums. Considering the tax benefits applicable on both premium payments and maturity proceeds, these life insurance plans are ideal to generate wealth for specific milestones such as a family vacation or sponsoring your child’s higher education. In the same vein, whole life insurance plans are the right choice for those looking to create a financial legacy for their family, helping them build a cash value that can be passed on to future generations by paying premiums. Such plans provide guaranteed life coverage, with exclusive benefits like loan facility against the policy and add-on covers for enhanced health coverage.

Curating personalized strategies for optimal tax planning

For business owners, life insurance tools such as key person insurance and Group Life insurance solutions can prove extremely vital to ensure business sustenance and ensure employee well-being. While key person or keyman insurance plans can be used by an employer to insure against losses arising due to the death of an employee who is critical to the business, a Group Life insurance cover can provide financial support to family members in case of an employee’s early demise or accidental disability. Premiums paid are allowed as business expense under Section 37(1) of the Income Tax Act, 1961, supporting business owners to claim the same as deductible tax expenditure while also uplifting employee morale. Similarly, for individuals looking to safeguard the interests of their loved ones, buying life insurance products early on in life and ensuring adequate insurance coverage is absolutely essential. That said, consulting with a professional financial advisor and creating a personalised investment strategy that can maximize the tax-saving potential offered by different life insurance products is highly recommended.

The author is Chief Operating Officer & Chief Technology Officer, Future Generali India Life Insurance Company Ltd. Views are personal.