Money9 Helpline: Can you pay premium on your parent's insurance for tax deduction?
Third-party payment is not allowed in the term insurance, says Naval Goel, founder and CEO, PolicyX.com
I work with an IT company with a post-tax salary just above Rs 1 lakh per month. I have a two-year-old daughter. My wife is a homemaker. I am willing to buy a term insurance plan. How much sum assured should I opt for? Can I take term insurance for my parents and claim that under 80-C?
— Mohit Sharma
Query responded by Naval Goel, Founder & CEO, PolicyX.com
The ideal sum insured in a life insurance policy should be at least ten times the annual income of the insured life, in case a person is above 35-40 years of age and at least 20 times of the annual income in case a person is below the age of 35 years.
This is because a relatively younger person will have more responsibilities to bear in life such as children’s education, marriage, home loan, and business, etc. An elderly person may have fewer liabilities and responsibilities to take care of. They would not require a higher sum assured.
The basic idea to have at least 10-20 times more of an annual income is to meet the financial requirements of the family in the future.
The insurance companies calculate the insurance coverage on the basis of the human life value method which primarily considers the value of future income, expenses, liabilities, and investments.
In this method, a person must consider his income, expenses, expected future responsibilities, and goals to determine the insurance need. This method is suggested as this gives better clarity keeping in mind the inflation.
Mohit can take term insurance of Rs 1 crore for himself and Rs 50 lakh for his wife as he has the benefit of securing his wife’s life. This will help him ensure the financial security to meet the education and wedding expenses of his daughter and other necessary expenses so that his family can maintain a good lifestyle.
No, he can’t take term insurance for his parents. Primarily, the term insurance is given only to working individuals. In case parents are not earning, they cannot get the policy. Secondly, third-party payment is not allowed in the term insurance. Therefore, he can’t pay a premium on behalf of his parents and take the tax deduction under section 80-C of the Income Tax Act.