Whole Life Insurance Tax Benefits

Life insurance plans provide coverage against premature death and grant financial security. However, some plans usually allow coverage up to a specified tenure or up to a specific age. What if you wanted coverage for the whole of your life?

This is where whole life insurance plans come into the picture. These plans allow lifelong coverage for specified protection. Moreover, you can also enjoy whole life tax benefits with these types of insurance plans on the premiums you pay, maturity amount you receive, if any and the death benefit under relevant sections of the Income Tax Act, 1961. So, let’s understand the concept and the tax advantages of whole life insurance plans.

What is A Whole Life Policy?

As the name suggests, whole life insurance plans are those that provide coverage for the whole of life¹. The plans cover you till 99 or 100 years of age². For instance, if you are aged 35 years, and the plan covers you for 100 years, you can enjoy coverage for the next 65 years, i.e. till you turn 100. Similarly, for a 25-year-old, the plan will run for 75 years; for a 40-year-old, the term will be 60 years.

In the case of death of the life assured during the coverage duration, i.e., before reaching 99 or 100 years of age, the death benefit is paid to the nominee(s) listed under the plan. On the other hand, if the insured survives the policy tenure, a maturity benefit is paid under some plans².

Types of Whole Life Insurance Plans

This is usually available as an optional feature, while there are some plans which exclusively offer whole life coverage. You can choose the whole life option/plan and enjoy coverage till 99 or 100 years of age or for your entire life.

Whole life coverage can be available under different types of life insurance plans. Here are a few –

1. Term Insurance Plans

There are term insurance plans that allow you to opt for whole-life coverage. Under term plans with the whole life option, a death benefit is paid to the nominee if the life insured dies during the term of the policy, before reaching 99 or 100 years of age.

2. Traditional Plans

Some traditional whole life plans also have bonus components and are hence categorized as Participating Whole Life Plans, wherein they provide an opportunity to participate in the bonus of the company. Whereas, if there is no component of bonus with a whole life coverage, it is categorized as Non-Participating Whole Life plan⁹.

3. Unit-Linked Insurance Plans or ULIPs:

The whole life coverage option is also available under some ULIPs, wherein your financial security of lifelong coverage and an opportunity for creation of long-term corpus is available.

Tax Advantages of Whole Life Insurance Plans

Here are the tax advantages of whole life insurance plans –

1. Tax Saving on Whole Life Insurance on Premiums Paid³

The premium paid for the whole life cover, irrespective of the type of plan that you buy, is allowed as a deduction under Section 80C of the Income Tax Act, 1961. The deduction limit is Rs.1.5 lakhs, subject to the following conditions –

• If the policy is issued on or after 1st April 2012, premiums up to 10% of the sum assured qualify for the deduction.
• If the policy is issued on or before 31st March 2012, premiums up to 20% of the sum assured qualify for the deduction.
• If the individual is suffering from any disability defined under Section 80U or disease defined under Section 80DDB and the policy is taken on, or after, 1st April 2013, premiums up to 15% of the sum assured qualify for the deduction.

2. Tax Saving on Whole Life Insurance on the Death Benefit

The whole life tax benefits are always applicable to death benefits. This means that the death benefit is always tax-free in the hands of the beneficiary, irrespective of the premium paid⁴.

3. Tax Saving on Whole Life Insurance on Maturity Benefit

In the case of endowment plans offering whole-life coverage, the maturity benefit is tax-free, provided the premium is 10%, 15%, or 20% of the sum assured as specified under Section 80C. The entire amount of maturity benefit received, including any bonus or guaranteed additions thereon, will be exempted from tax under Section 10(10D)⁵.

In the case of ULIPs, the tax advantages of whole life insurance plans will be as follows –

• If the policy is bought before 1st February 2021, the maturity benefit will be tax-free under Section 10(10D)⁵ if the premium qualifies for deduction under Section 80C.
• If, however, the policy is bought on or after 1st February 2021, the maturity benefit will be tax-free if the aggregate premium under all ULIPs is up to Rs.2.5 lakhs6. If the annual premium is more than Rs.2.5 lakhs, the returns earned from ULIPs will attract long-term capital gains tax. Such returns will be taxed as follows:
  • Equity returns will be exempted up to Rs.1 lakh. Returns in excess of Rs.1 lakh will be taxed at 10%⁶.
  • Debt returns will be taxed at 20% with indexation benefit⁶.
  • If the traditional insurance policy is issued before 1 April 2023, benefits from policy will be tax-free subject to satisfaction of conditions mentioned in Section 10(10D) of Income Tax Act. In Finance Budget 2023^$ it is proposed that If such policy is issued on or after 1 April 2023 with annual aggregate premium exceeds Rs. 5 lacs, benefits from policy will be taxable as “Income from Other Sources”.

4. Other Benefits of Tax Saving on Whole Life Insurance

ULIP-oriented whole-life plans also allow tax benefits on partial withdrawals⁷ and switching⁸. The amount withdrawn through partial withdrawals is tax-free⁷. Similarly, changing the investment funds through switching during the policy tenure does not attract any taxation⁸.

The bottom line

So, understand what is a whole life insurance plan and the tax benefits that it offers. Invest in a plan if it suits your financial needs and claim the tax advantages of whole life insurance when filing your income tax returns.

Reference links

1. https://www.insuranceinstituteofindia.com/downloads/IC38/ALEnglish.pdf (page 145 of book)

2. https://www.bajajallianzlife.com/life-insurance-guide/life/types-of-life-insurance-policies-in-india.html

3. https://incometaxindia.gov.in/tutorials/20.%20tax%20benefits%20due%20to%20health%20insurance.pdf(page no 2)

4. https://www.livemint.com/money/personal-finance/how-life-insurance-policies-are-taxed-11665145664260.html

5. https://taxguru.in/income-tax/section-10-10d-exemption-amount-received-life-insurance-policy.html 6.

https://cleartax.in/s/unit-linked-insurance-plan-taxation-rules#:~:text=Will%20the%20tax%20liability%20apply,made%20before%201st%20February%202022.

7. https://www.moneycontrol.com/news/business/personal-finance/how-ulips-stack-up-against-mfs-4452291.html

8. https://www.livemint.com/Money/UVmcTIYhDUqc8p3GIQXChO/How-to-make-that-taxfree-switch-in-Ulips-as-well-as-NPS.html

9. https://economictimes.indiatimes.com/tdmc/your-money/all-about-bonuses-in-life-insurance-plans/articleshow/52129026.cms?from=mdr

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