The Union Budget 2023 announcement in India has reignited the debate on the financial benefits of investing in life insurance products, particularly the importance of tax benefits on such investments. In India, many people continue to view life insurance as a tax saving tool, using the premium amount to offset a portion of their annual tax liability.
The emphasis on India’s new income tax regime, which offers reduced tax rates but eliminates most exemptions and deductions that taxpayers previously enjoyed under the old regime, including tax breaks on life insurance premiums, has raised concerns that it could discourage people to buy life insurance. As a result, individuals who could benefit from the financial protection provided by life insurance coverage may be deterred from seeking it.
Conversely, the proposal to tax maturities of life insurance products other than ULIPs with an annual premium of Rs. 5 lakh and above purchased on or after April 2023 has led to likely pre-booking of high-ticket non-ULIP policies in February and March 2023 to avoid the impact of taxation. However, taking a narrow approach, considering only tax benefits for such an important financial product as life insurance, can create several risks.
Tax breaks should not overshadow the importance of ensuring that coverage acquired is adequate, affordable and tailored to one’s unique financial circumstances and goals. Neglecting the primary purpose of life insurance – to provide financial protection – can lead to a misjudgment of the adequacy and suitability of the coverage acquired, which can compromise the financial security of your dependents.
On the other hand, it can also result in paying a higher premium and potentially miss out on the benefits of a more suitable 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.
The sum assured acts as a vital safety net that the policyholder’s family can rely on in the event of their untimely death. The Economic Survey 2023 revealed that households in India remain exposed to significant funding shortfalls in the event of the premature death of the primary breadwinner, underscoring the importance of adequate life insurance coverage. To ensure that the sum insured of the policy meets the financial needs, it is necessary to estimate the amount of coverage required.
A simple rule of thumb is to choose a term life cover that is at least ten times the primary dependent’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 in determining the adequate sum assured required to cover daily living expenses and crucial financial goals, if any, such as children’s education.
People should then carefully assess the policy term or the duration for which the beneficiaries will get financial coverage. The tenure should be sufficient to see the policyholder’s loved ones through their financial obligations. It becomes important to consider the key financial goals as well as the financial responsibilities of the policy holder while choosing the policy term.
In addition to these important factors, it is always worth evaluating the additional benefits or advantages offered by the life insurance policy. These riders provide an extra layer of protection against unforeseen events and risks. For example, critical illness cover provides a lump sum in case the policyholder is diagnosed with a critical illness, while a premium rider waiver ensures that the policy remains in force even if the policyholder is unable to pay the premiums due to disability or critical illness .
By prioritizing protection over tax breaks, people can provide their loved ones with economic stability in the future and peace of mind in the present. That is why it is essential to consider life insurance as an integral and indispensable part of the financial plan.
(The author is Senior Vice President and Head – Product Management, Max Life Insurance)
(Published April 14, 2024, 9:23 pm F)
