Published in Mint on Jan 05 2017, Written by Abhishek Bondia
I have a 10-year unit-linked insurance plan (Ulip) with an annual premium of Rs30,000. I have received a performance bonus that I want to invest in the same Ulip as a top-up. Will I get tax benefit on this also under section 80C or will the proceeds be tax-free under section 10(10)D of the income tax Act?
Insurance premiums, including top-up contributions, are eligible for income tax deduction under section 80C of the income tax Act. This is subject to the aggregate contribution in the year not exceeding 10% of the death benefit. To avail tax relief on proceeds under section 10(10)D, it is necessary that the death benefit in any year not be less than 10 times of that particular year’s contribution. Death benefit received by a nominee is tax-free.
What is the difference between an employer-employee policy, keyman insurance and a group term life policy for employees? We want to give high sum assured death benefit to our top management.
Employer-employee policy is one where the employer pays the premium but the beneficiary is an employee. It is a benefit given to select employees. Employers can pay premium for multiple employees via a single cheque. Employers need to mention in the proposal form that they want the employer-employee structure. Policy premium and benefits are the same as individual life insurance policy. Maturity proceeds are tax-free for employees and their family.
In keyman insurance, the company pays the premium to insure an employee’s life and the beneficiary is the company itself. It is a risk cover that the company buys for key employees, such as a chief executive officer, to protect against loss on account of death of the person. Policy premium and benefits are the same as an individual term plan. But the death benefit received is taxable in the hands of the company.
A group term life insurance is one where the company pays the premium to insure an employee’s life and the beneficiary is the employee. This benefit is given for a large set of employees, generally all. Policy premium and benefits are customized. A large group can negotiate lower premiums. Maturity proceeds are tax-free in the hands of the employee’s family.
I recommend an employer-employee option to cover the senior management team. In this, when employees leave an organization, they can get the policy converted to their name and continue paying premiums to enjoy the cover. As the life insurance premiums increase with age, buying early helps to lock in low premiums for the long term. Employees will value the fact that they don’t need to buy a separate personal cover to avail low premiums while still employed with the firm.
Why do insurers offer low sum assured for single-premium Ulips than for regular premium policies?
Insurance Regulatory and Development Authority of India (Irdai) requires that in case of single-premium products, minimum sum assured for age at entry below 45 years should be 125% of single premium. For age at entry of 45 years or above, it is 110% of single premium. The minimum sum assured for regular premium products is 10 times of annualized premium for age at entry below 45 years and seven times of annualized premium otherwise.
Several insurers offer the minimum stipulated sum assured for single-premium plans. This reduces the mortality cost in a plan and helps increase the effective investment yield. However, I do not recommend buying such low sum assured. Apart from low risk cover, it also jeopardizes tax benefits inherent in Ulips because the minimum threshold limits for tax benefits can be inadvertently breached.
Many single-premium Ulips allow increasing the sum assured to 10 times of the single premium paid. I recommend you opt for this enhancement.