For many, life insurance may be a long-term commitment. Therefore, choosing the right insurance plan may be one of the important decisions. For anyone thinking of buying life insurance, the primary motivation, might be the financial protection of their loved ones in their absence. To do so, one can choose from various types of life insurance. However, if you want more than the death benefit, it may help to narrow down the types of plans you can choose from. Endowment plans are one such popular dual benefit policies that offer you a life cover as well as a long-term savings opportunity
Endowment plans come with a host of benefits like death benefit, maturity benefit and survival benefit. Tax benefits are also something you should consider when choosing the suitable plan or buying one. If you buy an endowment plan, you can claim tax benefits in the form of deductions and exemptions as per the provisions of the Income Tax Act, 1961.
Before we better understand endowment plan tax benefits, let’s take a quick look at what are endowment plans, what they offer, and why you may consider getting one.
What are endowment plans?
To better answer the question, “What is an endowment policy?”, let’s first get a better idea of life insurance plans. Buying a life insurance policy is a contract between the policyholder and the insurance provider. As a part of the contract, the policyholder is required to pay premiums. On the other hand, the policy provider offers certain benefits against the premiums paid. While the range of benefits may differ based on the type of plan and insurer chosen, the death benefit is common across the numerous types of life insurance plans.
So, what is an endowment policy? It is the type of insurance plan that offers lump sum amount on maturity or on death. If all due premiums under the policy are paid, the policyholder will receive the survival benefit as money back and the maturity benefit on the maturity date, subject to the terms and conditions of the policy.
Based on the benefit offered, here are the type of endowment plans available today.
• Participating plans:
These type of endowment plans come with an additional bonus component. If during the term of the policy, the insurer earns profits, it may declare a bonus for the policyholders of these plans. The bonus is accrued over a period of time and may be offered as a part of the maturity benefit depending on policy terms and conditions.
• Non-participating plans:
If you seek guaranteed* maturity benefits on your endowment plan, go for a non-participating plan. They do not have a bonus component, but you receive a pre-decided amount at the end of your term duration, i.e., plan maturity.
• Unit-linked endowment plans:
As the name may suggest, these plans invest your money in a range of market-linked funds. Depending on what the insurance provider has to offer and your risk appetite, you may be able to choose the type of funds you want your money to be invested in. Just keep in mind that these plans come with a certain degree of risk, and hence, your maturity returns may vary depending on market conditions.
Besides maturity benefits, endowment policy tax benefits are also a factor to be considered when buying these policies. If you have opted for the old tax regime, you may be able to claim benefits for the premium paid under Section 80C of Income Tax Act, 1961, subject to provisions stated therein. Benefit received under the plan is tax free in the hands of recipient subject to satisfaction of conditions as mentioned in Section 10(10D) of Income Tax Act, 1961 subject to provisions stated therein.
Endowment policy tax benefits1
There are two types of endowment plan tax benefits that policyholders, nominees, as well as potential policy buyers, should be aware of. The first is the deduction that one can claim on the premiums. This is an deduction that is available under Section 80C of the Income Tax Act 1961 subject to satisfaction of conditions mentioned therein. This benefit can be useful for the policyholder paying the premium for the endowment plan. Deduction under this section can be availed of by the person paying the premium. Annually, one can only claim a deduction of up to Rs 1.5 lakhs under this section.
Another endowment policy tax exemption benefit is one that can be claimed under Section 10 (10D) of the Income Tax Act of 1961. This can be claimed on the benefits received from the plan. This includes the maturity benefit as well as the death benefit. Hence, if the policyholder survives the term duration of the plan and receives maturity benefit, they may be able to claim it as a tax exemption under this section. Similarly, if the nominee has received a death benefit from the policy, they may be able to claim an exemption under this section as well. This exemption is available on satisfaction of conditions as mentioned under Section 10(10D) only.
Should you get an endowment plan?
If you are looking for life insurance, endowment plans are one of the options you may consider. You may avail of survival benefits, maturity benefits as well as tax benefits on these plans, alongside the death benefit. Remember that deduction may only be claimed under Section 80C of the Income Tax Act 1961, if the claimant has opted for the old tax regime. Such claims cannot be made under the new tax regime2.
Remember to take a good look at all the features of the endowment plan you are considering and use an endowment plan premium calculator. This will help you get an idea of whether the plan is suitable for your pocket and will offer you the coverage you seek.
While tax benefits of endowment plans can be quite the pull, remember to consider the plan as a whole and see if it suits you. Also, once you buy the plan, update your nominee on what the plan has to offer.