BY SUNIL DHAWAN

It’s that time of year again. When people run around helter-skelter looking for ways to save taxes. While insurance is not an investment, it is a good way to achieve your purpose.

THERE ARE quite a few expenses or cash outflows which automatically entail tax benefits. Some of these are children’s tuition fees, interest payments on home loan and even premiums on your term plan.

Children’s fees. Under Section 80C, parents can claim a deduction for tuition fees for a maximum of two children within the overall limit of Rs.1 lakh. However, any payment towards development fees or donation to institutions is excluded.

Principal repayment on home loan. Equated-monthly instal­ments (EMIs) on a home loan constitute both the principal repaid and the interest. The principal repayment in a year up to Rs.1 lakh qualifies for deduction. Ask your bank for a copy of the statement showing the total amount repaid. Any part-payment made towards your home loan gets a similar tax treatment.

Life insurance. The premium that you pay towards a life insurance policy is eligible for tax deduction up to Rs.1 lakh. This applies to all pure term, endowment or unit-linked plans bought from any of the 21 private life insurance companies as well as from the government-owned Life Insurance Corporation of India (LIC). Renewal premiums also qualify for tax benefit.

However, while committing to any insurance product, the tax advantage should be considered only as an additional feature. Insurance is a long-term financial product and, hence, it becomes a cost-effective plan only when it runs for a long period. Pure-term insurance plans come with low premiums as they provide only protection. The products that have a provision for gener­ating return require a higher premium. If you are looking for investment and protection in the same product, savings plans like endowment, money-back or unit-linked insurance plans (Ulips) are the various options.

TERM PLAN

IF financial protection tops your mind, or even if you are look­ing to enhance your coverage, pure term insurance plans are the answer. The premium that pure term plans charge is the lowest among life-cover policies as they provide only life insurance for a specified number of years and do not offer any returns. If you outlive the policy, you will not get anything. However, in the event of your death during the term of the plan, your nominees will get the sum assured. So, if your aim is not to use insurance as an investment avenue, but only to protect your dependents from any eventuality, pure term is the right product as it will serve your need at the lowest cost. As term plans don’t have any sur­render or maturity value, purchase decisions are often based on premium. However, you should look at other factors as well.

Duration. Unlike endowment plans, the premium of term plans rises as its duration increases. However, life is uncertain and you should ideally choose a plan that covers you for long. It does not make sense, for instance, if a 30-year-old buys a term plan for just 25 years. If you expect to have dependents till late in your life, look for term plans that have a high maturity age, or go for longer term plans. You may split the sum assured in two policies to manage this risk.

Top-ups. Some plans allow hikes in cover at regular intervals without any financial or medical underwriting. Higher incre­mental premiums may be required as age advances, but they may still prove helpful in circumventing age-related health problems. These annual hikes are capped, but even small increases at regu­lar intervals add up to a neat overall rise. For instance, if a cover of Rs.10 lakh is increased by five percent every year, the total cover would become Rs.15 lakh in ten years. To identify the best plan for yourself, ask few insurers in your area to send you the premium quotes as per your age, coverage and maximum term.

Courtesy: Outlook Money