Benefits of Including Insurance in Your Financial Portfolio

Insurance is important because it acts as a safeguard against any unprecedented event. However well we plan, there are times when planning and execution fails. It is at this critical juncture that insurance policies play a vital role. Critical illness, natural and accidental death, loss of job or personal property cannot be controlled. Insurance covers you against these unforeseen financial issues.

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Disclaimer: #The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CAGR 8%; ₹50,45,591 @ CAGR 4%. *Tax benefits and savings are subject to changes in tax laws. All plans listed here are of insurance companies’ funds.

Along with providing all these benefits, most insurance investments fall under the EXEMPT-EXEMPT-EXEMPT (i.e. EEE) category when it comes to tax planning. This principle states that the insurance premiums, the profits earned on the insurance policy,and the sum assured,are completely tax free. It is beneficial to include insurance in your financial portfolio because as per Section 80 C of the Income Tax Act, it can reduce your taxable income by up to Rs. 1.5 lacs and your tax liability by up to Rs. 45,000.

Investing in the following insurance options stated under section 80C can save a substantial amount of your income from going towards taxes:

Term Plans

Term Plans are amongst the purest form of insurance. These plans cater to your need for protection of your family in your absence. A Term insurance requires you to pay small amounts as premium every year for a fixed term and provides risk coverage for that specified term. In case of your demise during the policy term, the decided cover amount is paid to your nominee.

Term Plans not only provide you financial security but also help you claim deductions from your taxable income upto the amount you pay as premiums. Also, the sum assured you receive after the policy term is completely exempted from taxes. However, to avail these tax benefits, make sure that the annual premium of your plan does not exceed 1/10th of the cover amount.

Medical Insurance and Critical Illness

Being insured against medical emergencies and critical illness is as important as having life insurance. A medical insurance plan reimburses you for the expenses incurred due to your hospitalization or domiciliary care. However, it requires you to submit some necessary proofs and is limited up to the amount mentioned in the policy. It also enables cashless hospitalization as the insurer directly pays your bills to the hospital.

Along with all these benefits, having a mediclaim policy can help you claim deductions from your taxable income and substantially reduce your tax liability. Money spent on medical expenses for self or dependent family member up to Rs. 25,000 is eligible for a deduction under section 80D of the Income Tax Act. One can also claim for the health expenses incurred for dependent parents. However, this claim is restricted to Rs. 30,000 if the parents are senior citizens and Rs. 25,000 if they are not. These tax benefits (under section 80D) are over and above the section 80C deductions.

There are 4 kinds of health insurance plans that you could choose from:

Medical insurance plan – Covers expenses incurred over a hospital visit of more than 24hours. Money spent is reimbursed, based on certain terms and conditions.
Hospitalization plan –This is inclusive of cashless health insurance plans. The health insurance company directly settles the bill with hospitals and therefore, reduces financial burden on the insured person at the time of hospitalization
Critical insurance plan – This plan ensures protection against terminal illnesses like neurological disorders, cancer and tumor
Super top-up plan –These are designed to provide additional health insurance coverage, over and above your existing health plan. They can be used to upgrade the sum assured of your base plan. Top-Up plan is an alternative to opting for additional health policy, which is usually an expensive option.

Child Plans

Child plans are essential in order to ensure a secure career and future for your child/children. Insurers offer plans such as children's endowment or money back, which entitles you to a pre-decided amount post maturity. In case of death of the parents, the child would receive the sum assured on maturity and the remaining premiums would be waived off.

Along with financial stability, child plans are amongst the top investment options for tax planning. Besides tax benefits, child plans ensure a future return for your child which will be a non-taxable income. As per section 80C, you can claim up to Rs. 1.5 lacs of premium paid towards child plans as deductions from your taxable income.

Retirement or Pension Plans

It is good to start planning for your retirement as soon as you start earning; because the early you start, the less you pay towards premium. Retirement plans by life insurance companies offer benefits of both insurance and investment. They usually have two phases:

The accumulation phase

During this phase you pay the premium and the money accumulates through tenure of the plan. This amount is usually invested in securities approved by the IRDA.

The vesting phase:

During the vesting phase, you start receiving the pension whenever decided by you. Ideally, it should be between 40 to 70 years.

As per Section 80CCC of the Income Tax Act, you can avail a deduction of up to Rs.1.5 lacs on the premium paid and one-third of the amount withdrawn on maturity will also be tax free.

Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer. Tax benefit is subject to changes in tax laws. *Standard T&C Apply

†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in

Past 10 Years' annualised returns as on 01-12-2024

^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

Tax benefit is subject to changes in tax laws. Standard T&C Apply
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CARG 8%; ₹50,45,591 @ CAGR 4%

¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.

**Returns are based on past 10 years’ fund performance data (Fund Data Source: Value Research).