Whole Life Insurance Tax Benefits

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 age. 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 plans.

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 plan.

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 Paid

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 paid.

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).

• 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) 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%.
• Debt returns will be taxed at 20% with indexation benefit.
• 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 withdrawals and switching. The amount withdrawn through partial withdrawals is tax-free. Similarly, changing the investment funds through switching during the policy tenure does not attract any taxation.

Long-Term Financial Benefits of Whole Life Insurance

Whole life insurance plans have several financial benefits for policyholders. Some of these benefits are as follows –

1. Long-term coverage

   The main feature of whole life insurance plans is their long-term coverage feature. You can enjoy coverage till 99 or 100 years of age, which helps you provide financial security to your family lifelong.

2. Different types of plans for different financial needs

   As mentioned earlier, there are different types of plans that come in the whole-life variant. You can choose a plan that matches your financial needs. For instance, if you are looking only for basic life insurance coverage, you can choose term plans which have the whole life coverage option. On the other hand, if you want to create a corpus for your long-term financial goals, you can choose endowment or ULIP plans with the whole life coverage option.

3. Corpus for financial goals

   With savings-oriented whole life plans, like endowment plans or ULIPs, you can save and create a corpus for your financial goals over the long term. While endowment-oriented whole life plans would help you create a stable corpus, ULIPs with the whole life coverage benefit can help you potentially earn market-linked returns.

4. Tax benefits of whole life insurance

   As is evident from the previous sections, too, whole life plans can offer tax-saving benefits. You can enjoy deductions on the premium paid under Section 80C of the old tax regime, which reduce your taxable income. The death benefit is tax-free, and the maturity benefit can also earn tax exemptions,  under both the new and old tax regime, subject to the stipulations of the Income Tax Act , 1961.

Key takeaways

1. A whole life policy is a life insurance plan that provides coverage till 99 or 100 years of age.
2. You can enjoy life insurance coverage as well as create a corpus for your financial goals with whole life insurance plans.
3. Whole life coverage can be offered with term plans, ULIPs, and other  traditional plans.
4. There are different tax advantages of whole life insurance plans.
5. Premiums paid for ULIPs qualify for a deduction under Section 80C up to ₹1.5 lakhs, under the old tax regime.
6. The death benefit received from a whole-life plan is always tax-free.
7. The maturity proceeds of a whole-life plan are also tax-free under Section 10(10D), subject to stipulations of the Income Tax Act , 1961.
8. Some of the benefits of whole-life plans include long-term coverage and financial security, tax savings, and corpus creation for your goals.

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.

FAQ on Tax Benefits on Whole Life Insurance

1. How is the cash value of whole life insurance taxed?

   The cash or surrender value of a whole life insurance policy, if applicable, can be tax-free if the policy is surrender after a minimum holding period.

2. Can I Claim Tax Deductions on Premiums Paid for Whole Life Insurance?

   The premiums paid for the whole life insurance plan are allowed as a deduction under Section 80C up to ₹1.5 lakhs, under the old tax regime.

3. How does whole life insurance help in estate planning from a tax perspective? 

   With savings-oriented whole-life insurance plans, you can save tax on the premiums and save up a tax-efficient corpus for your loved ones as part of estate planning. Since the policy proceeds are also tax efficient, your loved ones can receive a tax-free corpus for their needs. These are the main tax advantages of whole life insurance plans.

4. Are there any tax implications when surrendering a whole life insurance policy?

   The surrender of a whole life insurance policy can have tax implications if you surrender the policy in the initial years. For instance, if traditional whole life insurance plans are surrendered within 2 years, the premium deduction availed under Section 80C would be reversed, in case of old tax regime. In the case of ULIPs, there is lock in period of 5 years.