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Life insurance is more than just a way to provide for your loved ones after you’re gone. It can also be a powerful tool for legacy planning and saving on taxes. Legacy planning means ensuring that your wealth and assets are passed on to future generations in a smooth, tax-efficient way.
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Let us take a look at how life insurance helps you do that and how it can reduce the tax burden on you and your family.
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Life insurance is one of the best ways to ensure that your family or loved ones receive financial support after you pass away. Here’s how it can help with legacy planning:
Wealth Transfer: When you have life insurance, your family receives a lump sum payment, called the death benefit, after you pass away. This money can be used for any purpose, like paying off loans, covering living expenses, or ensuring your children’s education.
Fair Asset Distribution: If you have multiple heirs (e.g., children), life insurance helps you divide your wealth more fairly. For example, if one child gets the family home, you can ensure another child gets the equivalent value in life insurance payouts, keeping things balanced.
Quick Access to Cash: When someone passes away, their estate (such as property, money, and investments) usually goes through a process called probate, which can be time-consuming and expensive. Life insurance proceeds are usually paid directly to your beneficiaries, bypassing this process, so your loved ones get the money quickly.
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One of the big advantages of life insurance is the tax savings it offers. The Indian Income Tax Act, 1961, has several sections that give you tax breaks when you pay premiums or when your family receives the payout.
Under Section 80C, you can claim a tax deduction for the premiums you pay for your life insurance policy. The maximum deduction allowed is ₹1.5 lakh per year. This means you can reduce your taxable income by this amount, helping you save on taxes while also securing your family’s future.
The money your family receives from the life insurance policy when you pass away is tax-free under Section 10(10D). As long as the premiums you pay do not exceed 10% of the sum assured in a policy year, your family won’t have to pay any taxes on the death benefit. This makes life insurance a tax-efficient way to transfer wealth to the next generation.
For life insurance policies like endowment plans and unit-linked insurance plans (ULIPs), the maturity proceeds (the money you get when the policy term ends) are also tax-free under Section 10(10D). However, new tax rules introduced in 2023 state that if the annual premium exceeds ₹5 lakh, the maturity proceeds will be taxable.
Selecting the right kind of life insurance is key to successful legacy planning. Here are some common types:
Term Insurance: Term insurance plan gives your family a lump sum if you pass away during the policy period. It’s a simple and cost-effective way to provide for your family after your death.
Endowment Plans: These plans offer both insurance coverage and savings. If you live through the policy term, you get a lump sum payout, which can also serve as part of your legacy for your family.
Unit-Linked Insurance Plans (ULIPs): These policies combine life insurance with investment options, allowing you to build wealth while staying insured. The returns from ULIPs, if structured properly, can help you create a sizable inheritance for your heirs.
To get the most out of your life insurance for legacy planning, you need to structure your policy well. Here are some tips:
Nominee Selection: Ensure that you nominate the right people to receive the policy’s death benefit. You can even divide the payout between multiple nominees to ensure your wealth is fairly distributed.
Joint Life Insurance for Spouses: Some policies cover both spouses, ensuring that if one passes away, the surviving spouse is still covered. This is particularly useful for married couples in their legacy planning.
Avoiding Probate: One of the benefits of life insurance is that the payout generally bypasses the probate process, which means your beneficiaries get the money quickly, without long legal delays.
If you have minor children or dependents with special needs, you can set up a life insurance trust. This allows you to manage how the insurance proceeds are distributed after your death. A trustee will oversee the fund and make sure that it is used as per your instructions, ensuring that your dependents are financially protected.
Life insurance is a powerful tool for legacy planning and tax savings. It helps ensure that your family is financially secure while also offering significant tax advantages during your lifetime. Whether you want to transfer wealth, provide for specific family members, or ensure quick access to funds without legal complications, life insurance can help you meet those goals. To maximize its benefits, it’s always a good idea to consult a financial advisor or tax professional who can guide you based on your personal needs and the latest tax laws.
†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. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
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