Rediff India Abroad
 Rediff India Abroad Home  |  All the sections

Search:



The Web

India Abroad




Newsletters
Sign up today!

Article Tools
Email this article
Top emailed links
Print this article
Contact the editors
Discuss this article
Home > Business > Business Headline > Personal Finance


Tax benefits from pension plans, life insurance

January 10, 2006 07:46 IST
Last Updated: January 10, 2006 08:29 IST


Traditionally, buying life insurance has always formed an integral part of an individual's annual tax planning exercise. While it is important for individuals to have life cover, it is equally important that they buy insurance keeping both their long-term financial goals and their tax planning in mind.

This note explains the role of life insurance in an individual's tax planning exercise while also evaluating the various options available at one's disposal.

Term plans

A term plan is the most basic type of life insurance plan. In this plan, only the mortality charges and the sales and administration expenses are covered. There is no savings element; hence the individual does not receive any maturity benefits.

A term plan should form a part of every individual's portfolio. An illustration will help in understanding term plans better.

Cover yourself with a term plan

 

HDFC Standard Life (Term Assurance)

ICICI Prudential (Life Guard)

LIC (Anmol Jeevan I)

SBI Life (Shield)

Kotak Mahindra Old Mutual (Preferred Term plan)

Tenure

20

25

30

20

25

30

20

25

30

20

25

30

20

25

30

Age 25

Rs 2,720

Rs 2,770

Rs 2,820

Rs 2,977

Rs 2,977

Rs 3,150

Rs 2,544

Rs 2,861

NA

Rs 1,954

Rs 2,180

NA

Rs 2,424

Rs 2,535

Rs 2,755

Age 35

Rs 3,580

Rs 4,120

Rs 4,750

Rs 4,078

Rs 4,900

NA

Rs 4,613

Rs 5,534

NA

Rs 3,542

Rs 4,375

NA

Rs 3,747

Rs 4,188

Rs 4,739

Age 45

Rs 7,620

NA

NA

NA

NA

NA

NA

NA

NA

Rs 8,354

NA

NA

Rs 7,797

Rs 8,970

NA

The premiums given in the table are for a sum assured of Rs 1,000,000 for a healthy, non-smoking male.
Taxes as applicable may be levied on some premium quotes given above.
The premium quotes are as shown on websites of the respective insurance companies. Individuals are advised to contact the insurance companies for further details.

Let us suppose an individual aged 25 years, wants to buy a term plan for a tenure of 20 years and a sum assured of Rs 1,000,000. As the table shows, a term plan is offered by insurance companies at a very affordable rate. In case of an eventuality during the policy tenure, the individual's nominees stand to receive the sum assured of Rs 1,000,000.

Individuals should also note that the term plan offering differs across life insurance companies. It becomes important therefore to evaluate all the options at their disposal before finalising a plan from any one company. For example, some insurance companies offer a term plan with a maximum tenure of 25 years while other companies do so for 30 years. A certain insurance company also has an upper limit of Rs 1,000,000 for its sum assured.

Unit linked insurance plans (ULIPs)

Unit linked plans have been a rage of late. With the advent of the private insurance companies and increased competition, a lot has happened in terms of product innovation and aggressive marketing of the same. ULIPs basically work like a mutual fund with a life cover thrown in. They invest the premium in market-linked instruments like stocks, corporate bonds and government securities (G-secs).

The basic difference between ULIPs and traditional insurance plans is that while traditional plans invest mostly in bonds and Gsecs, ULIPs' mandate is to invest a major portion of their corpus in stocks. Individuals need to understand and digest this fact well before they decide to buy a ULIP.

Having said that, we believe that equities are best equipped to give better returns from a long term perspective as compared to other investment avenues like gold, property or bonds. This holds true especially in light of the fact that assured return life insurance schemes have now become a thing of the past. Today, policy returns really depend on how well the company is able to manage its finances.

However, investments in ULIPs should be in tune with the individual's risk appetite. Individuals who have a propensity to take risks could consider buying ULIPs with a higher equity component. Also, ULIP investments should fit into an individual's financial portfolio.

If, for example, the individual has already invested in tax saving funds while conducting his tax planning exercise, and his financial portfolio or his risk appetite doesn't 'permit' him to invest in ULIPs, then what he may need is a term plan and not unit linked insurance.

Pension/retirement plans

Planning for retirement is an important exercise for any individual. A retirement plan from a life insurance company helps an individual insure his life for a specific sum assured. At the same time, it helps him in accumulating a corpus, which he receives at the time of retirement.

Premiums paid for pension plans from life insurance companies enjoy tax benefits up to Rs 10,000 under Section 80CCC. Individuals while conducting their tax planning exercise could consider investing a portion of their insurance money in such plans.

Unit linked pension plans are also available with most insurance companies. As already mentioned earlier, such investments should be in tune with their risk appetites. However, individuals could contemplate investing in pension ULIPs since retirement planning is a long term activity.

Traditional endowment/endowment type plans

Individuals with a low risk appetite, who want an insurance cover, which will also give them returns on maturity could consider buying traditional endowment plans.

Such plans invest most of their monies in corporate bonds, G-secs and the money market. The return that an individual can expect on such plans should be in the 4%-7% range as given in the illustration below.

Looking 'traditional'

 

Age (Yrs)

Sum Assured (Rs)

Premium (Rs)

Tenure (Yrs)

Maturity Amount (Rs)*

Actual rate of return (%)

Company A

30

1,000,000

65,070

15

1,684,000

6.55

Company B

30

1,000,000

65202

15

1,766,559

7.09

The maturity amounts shown above are at the rate of 10% as per company illustrations. Returns calculated by the company are on the premium amount net of expenses.

Taxes as applicable may be levied on some premium quotes given above.

Individuals are advised to contact the insurance companies for further details.

A variant of endowment plans are child plans and money back plans. While they may be presented differently, they still remain endowment plans in essence. Such plans purport to give the individual either a certain sum at regular intervals (in case of money back plans) or as a lumpsum on maturity. They fit into an individual's tax planning exercise provided that there exists a need for such plans.

Tax benefits*

Premiums paid on life insurance plans enjoy tax benefits under Section 80C subject to an upper limit of Rs 100,000. The tax benefit on pension plans is subject to an upper limit of Rs 10,000 as per Section 80CCC (this falls within the overall Rs 100,000 Section 80C limit).

The maturity amount is currently treated as tax free in the hands of the individual on maturity under Section 10 (10D).

To reiterate, individuals should evaluate their needs first and then build a life insurance portfolio. In the tax planning exercise, the long-term financial goals should not be lost. Tax planning and financial planning should go hand in hand and help individuals face the good times as well as the adverse circumstances with élan.

*The tax benefits may differ under certain circumstances. They may also change in future. Please consult your tax advisor/ Chartered Accountant for further details.

  • The 2006 guide to Tax Planning. Download the complete guide today! Click here!
  • Investing to save tax? Personalfn can help you. Click here!





More Personal Finance

Share your comments


 What do you think about the story?




Read what others have to say:


Number of User Comments: 2




Sub: Tax benefits from pension plans

Dear Sir, Articles supplied by PersonalFM are normally inclined to Mutual Fund/Insurance products from some specific private players. Are they help to push these article? ...


Posted by Suman





Sub: Tax benefits

Dear Sir , I have been regularly reading your articles and find them an excellent guiding factor.I feel it would be still better if you ...


Posted by Pattabiraman av




Disclaimer


Advertisement






Copyright © 2006 Rediff.com India Limited. All Rights Reserved.