Insurance and Tax all on a Single Sheet

The union budget announced new deduction for people buying insurance. If you are confused about what deductions you are eligible for. Here is cheat sheet on that deductions you can claim.

 Life Insurance Premiums:

Deductions ae available under Section 80 C of the Income Tax Act up to a maximum of Rs. 150,000. Premiums can be paid on policies held by you on yourself, your spouse or your children. No exemption is available on any premiums paid by you on policies held by your parents or in-laws or any other relatives. The amount of premiums, subject to this limit, is deducted from total income to arrive at the taxable income.

Life Insurance policies can be divided into 4 categories for tax purposes.

Policies purchased BEFORE 1^st April 2012 where Premium is LESS than 20% of Sum Assured: Tax Rebate available under Sec 80 C up to a maximum of Rs. 150,000 per annum. Maturity or surrender proceeds exempt from tax under Sec 10 (10) (D). A Death Claim is completely exempt from tax.

Policies purchased BEFORE 1^st April 2012 where Premium is MORE than 20% of Sum Assured: Tax Rebate available under Sec 80 C up to a maximum of Rs. 150,000 per annum up to the portion of premium that falls within 20% of the Sum Assured. Maturity or surrender proceeds NOT exempt from tax under Sec 10 (10) (D). TDS @2% will be deducted by the Insurance Company at the time of maturity claim payout, enabling tax trail for the Income Tax authorities. A Death Claim is completely exempt from tax.

Policies purchased AFTER 1^st April 2012 where Premium is LESS than 10% of Sum Assured: Tax Rebate available under Sec 80 C up to a maximum of Rs. 150,000 per annum. Maturity or surrender proceeds exempt from tax under Sec 10 (10) (D). A Death Claim is completely exempt from tax.

Policies purchased AFTER 1^st April 2012 where Premium is MORE than 10% of Sum Assured: Tax Rebate available under Sec 80 C up to a maximum of Rs. 150,000 per annum up to the portion of premium that falls within 20% of the Sum Assured. Maturity or surrender proceeds NOT exempt from tax under Sec 10 (10) (D). TDS @2% will be deducted by the Insurance Company at the time of maturity claim payout enabling tax trail for the Income Tax authorities. A Death Claim is completely exempt from tax.

Notes:

1.  The provision on tax liability under Sec 10 (10) (D) will not be applicable in cases where the proceeds from a life policy in a year are less than Rs. 1 lakh.
2. Maturity proceeds include any sum allocated by way of bonus.
3.  Where PAN card details are not available, the deduction shall be 20 percent. 
4. Policy loan is not a benefit. It's a repayable obligation. Hence it is not taxable.

Annuity Policies:

Premiums paid to keep in force a contract for annuity plans are eligible for a tax rebate under Sec 80 C and its sub-sections within the same cumulative limit of Rs. 150,000. Any amounts paid out as annuity is subject to tax as per your then income tax slab.

Health Insurance:

Tax exemptions on health insurance premiums are simpler in structure. Premiums up to Rs 25000 per annum are exempt from tax under Sec 80 D.  Premiums can be paid for policies covering self, spouse, dependant parents or dependant children. For Senior citizens, the limit is now Rs.30000. Senior citizens are defined as those who have attained an age of 60 years. The table below will explain these limits.

Item	Rs. Premiums Paid Eligible for Exemption under Section 80 D		Rs. Maximum Deduction Possible under Section 80 D
	Self, Spouse, Dependant Children	Parents (Need Not be Dependant)
All Below Age 60	25000	25000	50000
Purchaser and Family Less than age 60 but Parents are above age 60	25000	30000	55000
Purchaser and his parents are above age 60	30000	30000	60000

Notes:

1. The limits mentioned above for Health Insurance is proposed in the budget presented on 28^th February 2015 and will apply from FY 2015-16 onwards. The current limit is Rs. 15000. For senior citizens the current limit is Rs. 20000.
2. Premiums paid for parents-in-law are not eligible for tax exemption.
3. Premiums must be paid by cheque/net banking. Cash payments are not eligible for exemption.

Home Insurance: There is no exemption available on any premiums paid towards home insurance.

Group Insurance: Premiums paid by your employer on your behalf for group health insurance for you and your family is tax exempt.

Service Tax: Before we conclude, one additional point is to be remembered. It is proposed to raise Service tax 12.36% to 14%. This will impact all premiums that are paid.

Why are Surrender Values for life Insurance So Low

Background: 

If you have ever surrendered a policy, you would have been shocked at the meager amount you received. It would have been much lesser than the amounts paid by you. Let us try and explain why this was so.  

Insurance is a long term contract. Your obligation is to pay the premium on a regular basis. The insurer is obliged to provide cover against the insured event. Contracts can be terminated by either party usually by paying a penalty. Insurers rarely terminate a contract unless the policyholder has committed a breach of his obligations. In rare cases if an insurer goes out of business or winds up his business he may opt to pre-maturely terminate the policy. On the other hand, if you voluntarily terminate the contract before you pay all the premiums, and intimate the company that you are not going to continue, and seek a refund of premium, you have indicated a desire to surrender the policy. The entire premium is almost never refunded. The difference is the penalty for early termination and is called the surrender charge. These charges can be quite steep and is the reason why surrender values are so low.  

Insurance contracts can range from a few days to many years. As a general rule: 

• The shorter the contract the lesser the chances of getting any refund via surrender. 
• Pure risk policies have no surrender values (i.e. entire premiums paid is confiscated). 
• Indemnity policies have little or no surrender value. 
• The longer the duration of the policy, the greater the surrender value the policyholder will get.  

In India long term contracts are usually life insurance contracts and surrender is a provision in most of these provided they are savings policies. Pure Term policies have no surrender value. 

So why is Surrender Value Low? 

Unlike other products and services insurance is bought in installments: however the insurer is fully liable from day 1. Further, insurers spend a lot of money in the initial years for acquiring the policy, pay large distribution expenses and keep aside reserves for claims. These amounts are recovered by them over a period of time from the subsequent premiums paid by the policyholder. Thus if a policyholder breaks the contract by surrendering, the insurer will remain out-of-pocket. These are the amounts recovered by the insurer as surrender charge. 

We are not debating if the charges are justified or can be reduced. The fact is that surrender charges will always exist. Our advice is that one should always aim to continue a contract till the stipulated date. A roundabout way of minimizing loss is by splitting the policy at purchase such that the entire policy need not be surrendered if there is an urgent need for money. Insurers try and restrict this by offering rebates if the premium is large enough. As always, you can count on us to help you solve any questions you have on this issue. 

We at www.policylitmus.com try to offer the best possible advice and options for customers of insurance. Visit our website to find out more. 

The Wise Buy Insurance: The Not so Wise Buy Policies

We all know the local insurance agent whom we try and avoid. His sole aim in life is to tell you of a new “scheme” that will bring us eternal happiness. We avoid him or run away from him or do not pick up his calls, yet, somehow, we do end up buying from him. The primary weapon in his arsenal is persistence. You will have never encountered another human being who can take rejection so well and still keep up the effort. He is unfazed by the word “no”, will wait patiently for times to change and still pursue his profession with the enthusiasm of the convert.

His reasons are many: the latest contest, his target achievements, or the upcoming tax season. The net result: we end up with several insurance policies that we struggle to manage. Our portfolio will have small policies, unnecessary policies, lapsed policies and unknown policies. A large proportion amongst us does not even know what is in our portfolio. This is not economic protection but favours done. We have not purchased insurance, we have purchased policies.

What is the difference? Insurance is the creation of an asset that will substitute economic value. The purchase of insurance is a reasoned out process based on need, right fit and price. Insurance is valuable only if it can be encashed at the time of need. Imagine buying from a company that rejects a large percentage of claims on flimsy reasons. Not only are paid premiums wasted, the objective of the purchase is defeated. Most of us are under insured, or have purchased the wrong type of policy.

Truth be told, very little can be done about what has already happened. In most cases surrender of older policies will produce insignificant returns. General insurance policies like health insurance or motor insurance will fetch you nothing on surrender. Our recommendation is that for your life insurance requirements, make a review and ensure adequate coverage. The product you buy should be the one that gives you the greatest confidence regarding reliability of claim payment. For your Health, Motor and Home protection requirements review your portfolio today and take charge. Health policies are portable and can be changed without trouble. Motor policies protect your No-Claim-Bonus (NCB).

Before you start changing your portfolio, compare on www.policylitmus.com to find out the product that fits you the best. Choose not only on price but on claims performance  and customer satisfaction parameters without surrendering your privacy.

Why are so many people victims of Insurance misselling?

Blame yourself!

Almost everyone knows someone who has bought a policy and has regretted it. Sometime back I had conducted a quick, informal 5-question survey that threw up some interesting results.

Almost all of those who were surveyed, knew the person who had helped them purchase (usually their agent); most of them could remember the premium commitment they had made, somewhat lesser numbers were unaware of the details of the product they had purchased (those who scratched their heads and came up with vague replies like LIC or Money-back or ULIP were marked as people who could not remember details). A few cavaliers could not name the company they had purchased from (Customers of LIC were honorable exceptions when it came to remembering the company).

I summoned up the courage to ask them the final question: if they knew enough about payment schedules and bonus rates and fund apportionment and claim repudiation ratios. Replies were fairly colorful; suffice to say that the survey wound up at that spot.

We all know why we buy. I can say with a fair degree of certainty that it is almost always never for the right reason. Why is it that when we pay that first few thousands as premium we do not find out what we are getting into? If we buy for the wrong reasons and then cannot even remember what we bought, can we be called victims of misselling?

Think of the time you purchased your last smartphone, or television, or when you planned your family vacation. Remember how you had agonized over the choices, pored over the details, asked your friends, compared on the internet and generally made life hell for those around you? Now think of the time you plunked down the first premium for your insurance.

If you feel that this only applies to you, pause, you are in good company. Our inability to do a little research before we buy insurance is widespread in the population. Industry captains, smart entrepreneurs, government clerks, you name them, and they are in the list. It is obvious that an agent will spot this advantage and move in. Can you then blame him for selling you a dud? The fact is we cannot escape the responsibility of our own inaction.

This does not in any way condone the behavior of an agent who mis-informs and makes a sale. At our end, a little research, however, goes a long way. You can still oblige your tax advisor, or your friend, or save tax or whatever else is your reason for buying. But there is no reason for you to not make an informed decision on buying Insurance.

Amit Kumar