Dev Ashish

Parents can’t be paying perennially for their adult children’s money mistakes. If they do, how will their children ever grow up financially? Isn’t it?

And helping your children in times of need is fine. But such occurrences should be rare.

I wrote a column on MoneyControl about this. You can read it by clicking below link:

Don’t Be Your Child’s Emergency Fund!

Hope you find it interesting.

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The real purpose of purchasing life insurance is to avoid tragic stories like this. But many still wrongly feel, that life insurance is a waste of money. But luckily and thanks to our government’s tax-saving policies, they still end up buying some insurance for secondary reasons like using Section 80C tax benefits.

Better something than nothing at all. Right?

Nevertheless, the main purpose of buying life insurance is to financially secure your dependents. The tax benefit on premium paid for a life insurance policy (may it be term plans, traditional moneyback or endowment plans or Ulips) is an important additional advantage of life insurance.

This post details the income tax benefits on insurance plans in India (like income tax benefits on term plans, income tax benefits on endowment plans, income tax benefits on single premium plans, income tax benefits on money back policies, income tax benefits on Ulips).

And please note that we are not just concerned about the Section 80C benefit on insurance premiums you pay year after year. It is also important to focus on whether the maturity benefits of all life insurance policies are tax-free in your hands or not. This is one angle that is often neglected at the time of buying insurance.

Note – Some people have this confusion that the life insurance policy taken from LIC alone will qualify for tax benefits under section 80C and Section 10 (10D). This is incorrect. Tax benefits on life insurance policies are valid irrespective of whether it is purchased from LIC or from any other private insurance company (approved by IRDAI).

So let’s move on and understand various taxation aspects on life insurance policies as per the latest income tax laws in India:

Tax Deductions (on Insurance Premiums) under Section 80C

First question – Are premiums paid on life insurance tax deductible?

The answer is – Yes. You can avail tax benefits on the premiums paid for purchasing/renewing life insurance policies (for self, spouse, children).

Second question – How much life insurance premium is tax deductible?

The life insurance premium paid should not exceed 10% of the sum assured of the policy (where the policy has been issued after 1st April 2012).

What does it mean exactly?

Suppose you purchase life insurance with a cover of Rs 5 lakh (sum assured) with an annual premium of Rs 63,000. In this case, the premium paid (i.e. Rs 63,000) exceeds the 10% limit of sum assured (Rs 50,000 = 10% of Rs 5 lakh). So you will only get a tax deduction on the Rs 50,000 and not on the full Rs 63,000). Any premium in excess of the limit (10% of Sum Assured) will not qualify for tax deduction under section 80C of the Income Tax Act.

Remember, this 10% limit is for policies issued after 1st April 2012.

For policies issued before 1st April 2012, the premium paid should not exceed 20% of the sum assured in order to claim this deduction.

To summarize the tax deductions on premiums paid for life insurance policy under Section 80C:

• For life insurance purchased before 1st April 2012: The tax deduction is applicable only for the premium which is up to 20% of the sum assured.
• For life insurance purchased after 1st April 2012: The tax deduction is applicable only for the premium which is up to 10% of the sum assured.
• Additionally, for insurances issued on or after 1st April 2013 (to a person suffering from disability/ailment), the maximum deduction is up to 15% of the sum assured.

Now you know that it is not necessary that the full life insurance premium you paid will be available as a deduction for tax saving.

One more thing – the life insurance premium paid can be claimed for deduction under section 80C only in the financial year in which it is paid.

That said, whatever be the tax deduction available after the 10% sum assured rule (discussed above), the overall deduction will be limited by the Rs 1.5 lakh limit set for Section 80C of the Income Tax Act, 1961 for maximum tax benefit.

So that was about the tax benefits (deduction) that you get while paying the insurance premiums.

Now let’s discuss what happens on maturity of the policy?

Taxation of Insurance Maturity under Section 10 (10 D)

Most people are blinded by the tax benefits being offered during the premium payment phase. They forget to check whether the maturity amount from their insurance policies will be tax-free or not.

Interestingly, most people have this impression that the maturity proceeds of life insurance policies are fully tax free.

But this is not always the case.

There are certain conditions (scenarios) where the insurance maturity amount is not tax-free. So if you are an insurance holder (endowment, moneyback, etc.), then it is in your best interest to understand the taxation of insurance policy maturity amount under Section 10 (10)D of the Income tax Act.

So what does the Section 10 (10D) of the Income Tax Act, 1961 say?

• For life insurance purchased before 1st April 2012: If the premium paid exceeds 20% of the sum assured, then the policy maturity proceeds would be taxable in the hands of the insured person.
• For life insurance purchased after 1st April 2012: If the premium paid exceeds 10% of the sum assured, then the policy maturity proceeds would be taxable in the hands of the insured person.
• Additionally, for insurances issued on or after 1st April 2013 (to a person suffering from disability/ailment), the above-mentioned limit stands at 15%

So if you were asking are maturity benefits of all life insurance policies tax-free, then now you know that in case the premium paid in any year exceeds 10% (or 20% for policies issued before April 2012) of sum assured, then the whole maturity proceeds would be taxed in the year of receipt.

That was about the maturity proceeds.

But in case of death of the insured person, the death benefit received shall be tax free in the hands of the nominees (even if the premium paid in any year crossed the percentage limit 10% of the sum assured).

Exemption under section 10(10D) on Maturity amount is granted only if the premium paid in any year does not exceed 10% of the sum assured for the policies issued after 1st April 2012 and 20% of sum assured for policies issued before 1st April 2012. That is the main fine print that you should be aware of when planning to buy a life insurance policy.

Section 80C + Section 10 (10D) Life Insurance Taxation

If we combine the limits and details in these two sections, then this is what we get:

If the policy is purchased after 1^st April 2012 and premium is more than 10% of the sum assured, then:

• Only that premium will be eligible for tax deduction under Section 80C which is equal or less than 10% of the sum assured.
• On maturity, the insurance maturity amount will be taxed as the premium was more than 10% of the sum assured. This is a bigger hit for insurance buyers and comes several years later when its already too late to do anything.

So in your best interest, if you are planning to buy life insurance, do not ignore the tax angle. Make sure that the premium paid is not more than 10% of the total sum assured. Because if you don’t and the premium is more than 10% of sum assured, then only a part of the insurance premium will be tax deductible. If that wasn’t bad enough, the maturity proceeds of the insurance policy will also be taxable at the time of maturity.

If in doubt and if you feel your insurance agent is fooling you, throw your knowledge of the 10% rule of Section 80C and 10(10D) on him. He will be forced to revise his claims if he is lying.

There are various life insurance products like endowment plans, moneyback plans, whole life plans. But the most effective life insurance is Term Insurance. All others mix insurance with investments which results in underinsurance and poor returns on maturity.

I have long advocated that Term Life Plan is the best life insurance option for most people. But also remember that unlike Unit Link Insurance Plan and traditional insurance plans, there is no maturity amount in term plans. Only death benefits.

But nevertheless, whenever you are purchasing insurance, it is important to understand how much of your premiums will get tax deducted and what is the taxability of life insurance maturity payout. Since most people buy insurance as a tax saving & investment product, these important things get overlooked. That said, it’s wrong and you should never purchase a financial product just to save taxes.

So hopefully, you now have a better idea about the taxability and income tax benefits of the Life insurance plans in India.

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I was reading an old article titled False Profits by Jason Zweig here when I felt that it made sense to be shared with the reader here.

So allow me to share parts of the article. I am sure you will understand why I felt like sharing it:

Note – The text in italics is taken exactly from the article.

Everywhere you turn, someone is selling investment hogwash: seductive-sounding ideas that will supposedly enable you to beat the market and buy a tropical island with the proceeds. 

In the past year or so, many investors’ minds have been hijacked by these false beliefs…

More than ever, people think the test of an investment’s validity is whether it “worked.” If they beat Standard & Poor’s 500-stock index over any period, no matter how dumb or dangerous their tactics, people boast they were “right.” But investing successfully over the course of a lifetime has nothing to do with being right in the short term. To reach your long-term financial goals, you must be sustainably and reliably right. While the techniques that are so trendy now – day trading, ignoring diversification, flipping funds, following “systems” – may seem right on a given day, they slash your odds of being right in the long run. 

Imagine that two places are 130 miles (or 210 kms) apart. If I observe the 65-mph (105 kmph) speed limit, I’ll drive this distance in two hours. But if I go 130 mph (or 210 kmph), I can get there in just one hour. If I try this and survive, am I “right”? Should you be tempted to try it too because it “worked”?

The flashy new ideas for beating the market are much the same: In short streaks, if you’re lucky, they will work. Over time, they will get you killed financially.

Let’s keep this post short.

Unless you are professional investor whose sole aim is to maximize returns by taking large risks (which can blow up in the face), you are better off following investment strategy which doesn’t take unnecessary risks and focuses on increasing the odds of reaching your financial goal, i.e. having right amount of money at the right time of your life.

There are several high-risk strategies (like this) that are unsuitable for common people. But greed (and glamour) gets the better of them. Most people are much suited to follow a simple Goal-based Investing philosophy. All else is noise.

By the way, you may ask as to why am reminding you all of the downsides of high-risk strategies (just like driving fast) when your portfolios are already down due to poor returns (and big crashes in non-large-cap space) in the past year or so?

It’s because you won’t listen to me when things are going good. Isn’t it? 😉

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When it comes to health insurance, most people have only their employer’s group health insurance coverage in India.

It’s like that the salaried Indians are more content with group health cover which is provided by their employers. As a result, they do not feel the need for any standalone individual health policy.

And this is very common. Most employees in the organized sector are covered by the group health insurance plans in India or medical insurance policy for employees in India.

You may say that health insurance is health insurance whether it is given by the employer or bought by self. But apart from some similarities, there are certain differences between group health insurance and individual health insurance.

Where an employer-based group health insurance is one single policy that covers all the people working in an organization, the individual health insurance plan covers (as the name suggests) only the policyholder (and family if family floater health insurance plan is bought).

Employer-based Health Insurance Plans Vs Individual Health Insurance Plans Or Group vs individual insurance – is a debate that confuses a lot of people.

Nevertheless, health insurance is important and as odd as it may sound, health insurance protects your wealth.

And when it comes to the salaried individuals, the more important question is whether an Employer provided Group Medical Insurance is sufficient or not. Group health insurance plans in India are many and vary from employer to employer. But whether the plan on offer is good enough or not is something that should be seriously considered.

Now before we get to why depending solely on employer’s group health insurance coverage isn’t a very good idea, let’s first take a brief look at some of the differences between the group cover and the personal individual health cover:

• Waiting Periods – The individual health insurance begins after the waiting period is over. Waiting periods start from 30 days for the policy to be effective and go up to several months (years) in case of specific diseases/treatments. Group health insurance, on the other hand, has practically no waiting period. Coverage begins from day 1.
• Validity of Insurance – The individual policies are valid for as long as the premium is paid (and policy is renewed) by the policyholder. The employer-sponsored group health insurance is valid until the employer employs the person.
• Medical Checkup – Generally, there is no requirement of undergoing a medical checkup (for self and family members) under the employer’s group health insurance. So if you are looking for health insurance without medical check-up in India, then that’s your answer. But checkup may be needed for individual health insurance plans.
• Insurance Cover Amount – In the individual cover, the policyholder can choose whatever cover he wishes to pay the premium for. But this flexibility isn’t available with employer-sponsored health plans where the employer decides the coverage amount and whether to increase or decrease it as per their discretion.
• Tax Benefits (under Section 80D) – For the individual health plans, the tax benefits accrue to the policyholder under section 80D of the Income Tax Act,1961 (read about latest health insurance tax benefits). But there are no tax benefits for employees who are covered under the Employer’s Health Plans. But if the employee pays a part of group insurance premiums, then that part can be claimed under tax deduction limits of the individual employee. That is all to taxability of health insurance premiums paid by the employer that there is in India.

Atleast some of these points will make the employer-provided group health insurance plans attractive to the employees. And you may feel that it is better to get health insurance through your job.

That is true to an extent. Getting under the coverage of group medical insurance plans in India is no doubt better than not being insured any day.

But as I said earlier too, the question after a while will be whether it is wise to depend solely on the employer for your health insurance needs?

The answer is that it isn’t.

Let’s see why:

1. Sum Insured (coverage) may be Insufficient – The sum insured provided by the employer’s health plan may be insufficient. Suppose the cover provided is just Rs 3 lakh. Is it enough for a family of four? No. So one should check whether the cover provided is sufficient or not for individual needs. Who knows multiple people of one family may require hospitalization in a year. Then what? The employer’s cover will get exhausted quickly and may be insufficient. In group health plans, one cannot change the coverage amount depending upon personal requirements (though some employers may allow for it by paying additional premiums)
2. Negative Policy Changes at Workplace – What would you do if for some reason (like cost-cutting, etc.), the employer decides to do away with health insurance or reduce the coverage substantially? It is not in your hand and employer is the boss. You will be left unprotected and underinsured.
3. Cover during/after Job Switch – You already know that employer-provided insurance cover is valid only till one is employed with the employer. In case of a job switch with a gap in between, the person will be unprotected. Also, there is no guarantee that the next employer will necessarily have a group employer-provided health insurance plan for employees.
4. As an extension of the previous point, if you are covered only by your employer’s health coverage and are planning to quit your job and go out on your own, then better take an individual health cover much before you make the transition.
5. At times, group health cover may have clauses like co-pay and deductibles that the employee would be required to pay in case of making a claim. This is not the case in most individual covers for young-to-middle-aged individuals.
6. Who will insure health after Retirement – If you are nearing retirement and still only have group health cover, then you will be left with no health cover after retirement from the job. This is dangerous as medical expenses after retirement can be huge. So one should make sure to have an independent individual health insurance policy much earlier than retirement. This is to first ensure that all the waiting periods are exhausted much before the retirement begins and also to cover the risk of being denied fresh purchase of health insurance during old age due to future health issues (if any).

All said and done, employer-provided group health insurance plans in India have decent benefits to begin with. But their inherent limitations and lack of flexibility make it necessary for people to not rely solely on them. You have broadly understood how group vs individual insurance differ.

So if you really want to have more independence when it comes to health coverage, then it’s better to have a personal health insurance plan according to your unique needs.

This way, you will also not depend on the employer’s whims and fancies and be protected in future too (if job switch or loss makes you uninsured temporarily).

Now you make ask how much health insurance cover should you buy?

There is no one answer that fits everyone here.

• But looking at rising costs of hospitalization and increasing frequency of lifestyle diseases, taking atleast a cover of Rs 7-10 lakh is advisable. Ofcourse, premium affordability is one factor that will be considered. But this is a good target to begin with.
• In addition to your coverage under the company’s group medical insurance plan in India, go ahead and purchase a standard health insurance policy.
• In the case of hospitalization, first, use your employer’s cover. If bills are more, then make use of the personal health insurance (assuming it is bigger than the company provided one)
• When it seems that the coverage isn’t big enough for future health risks, go for super top-up health insurance. What is that? In brief, the super top-up policies kick in after a threshold. Suppose your base cover is of Rs 5 lakh. And you take super top-up insurance of Rs 15 lakh. Then the bills between Rs 5 lakh and Rs 15 lakh will be settled by your top-up plan as threshold kicks in at Rs 5 lakh. Super top-up health covers are cheaper than base plans as they provide coverage only after a certain limit as explained above.
• Also, it might seem like a waste of money but try to buy personal health insurance as early as possible. That way, your starting premiums will be low and you will not be denied policy purchase later on (which may be the case in later years when health isn’t so good).

Please don’t think that I am against group health insurance plans in India. In fact, it’s an extremely good benefit for young earners who do not know the importance of health insurance. So if you ask me Can I buy health insurance if my employer offers it? The answer is Yes! Go ahead.

But in due course of time, understand the Iimitation of such covers and buy a personal health plan as well.

I hope it’s now clear why you cannot rely only on group health insurance cover provided by your Employer and why the Employer-provided Health Insurance is not enough. Though both seem same, there are indeed subtle fundamental differences in group health insurance vs individual health insurance policy in India.

So don’t tell me that I have group health cover from the employer. I don’t need a personal health insurance plan.

Health insurance is necessary for everyone. I would advise all of you reading this post to purchase a personal (family) health insurance cover apart from what you already have from employer-provided group cover. That way, you will not depend 100% on your employer’s health insurance.

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Recently, I got quoted a few times in a magazine named ‘Open’ in their Wealth Special Issue 2019.

The article was titled A Portrait of the Crore. And you can read it using the below link:

A Portrait of the Crore

The calculations referred to in this published article are from a post I wrote sometime back – Can you Retire with Rs 1 Crore in India today?

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