Are life insurance products tax free?

Life insurance premiums up to Rs. 1.5 lakh per year are tax-free under Section 80C of the Income Tax Act. Furthermore, under Section 10 (10D), the death benefit paid to beneficiaries is also tax-free. However, tax laws are subject to change from time to time.

Term Insurance Vs ULIP

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Every insurance policy has its advantages and disadvantages. This makes it difficult for most of us to determine what to do, especially with financial experts advocating a wide range of solutions and investing philosophies based on their own knowledge. Even a simple and uncomplicated product like term insurance is being compared to more modern and complex products like ULIPs, which only adds to the uncertainty of new investors/ policyholders.

A healthy financial plan includes proper savings and investments, as well as adequate insurance. With so many insurance products on the market, determining which one is best for you can be difficult.

Every insurance plan has advantages and disadvantages, but the goal is the same. The goal of purchasing insurance is to offer financial security for our loved ones and ourselves., The market offers a variety of insurance policies, depending on the financial goals of the policyholder.

If, like many others, you've been debating whether to invest in a ULIP or buy a term insurance plan, here's all you need to know about the two products to help you decide.

Term Insurance

Term insurance, as the name implies, offers life insurance for a certain period of time. You have the freedom to pick this duration, which might last anywhere from 5 years to your whole life. Because they are basic insurance policies, their rates are quite low. However, if you fail to pay your premiums on time, the insurance will expire. It's also worth noting that if you outlive the insurance, there will be no payoff at the conclusion of the term. The insurance only covers one risk: death.

Features of Term Insurance

Some important term insurance features are as follows :

When you die, the policy pays out death benefits to your nominees.
Some insurers provide maturity bonuses in their products to make them more flexible. To be eligible for this benefit, you must have a return of premium cover. If you survive the term, the insurer will reimburse the premiums you paid for the coverage.
Term insurance is the most cost-effective life insurance policy on the market. Throughout the policy's term, you pay a certain amount of money periodically as premiums.
The premiums paid for the plan are tax deductible under Section 80C of the Income Tax Act. Furthermore, the death and maturity benefits are also tax-free. However, tax benefits are as per current income tax laws and are subject to change from time to time.

ULIPs

ULIPs, or Unit Linked Insurance Plans, offer both life insurance and an investment opportunity. One portion of your premium is utilised as mortality costs to provide you with insurance, while the remainder is placed in different financial products such as bonds, debt, stocks, or a hybrid fund. When the policy matures, you will be eligible to the sum assured and/or the capital value of the unit-linked assets as a distribution.

Features of Unit Linked Investment Plans

The following are the primary benefits of ULIP investments :

The policy provides dual advantages, allowing you to receive life insurance coverage as well as wealth growth under a single plan.
You (the policyholder) have the option of investing in debt funds, equity-oriented funds, or a combination of the two. This decision is influenced by your risk tolerance.
ULIPs provide you with the freedom to swap funds to get a higher market return. So, if you believe your stock market investments are underperforming, you can swap (from debt to equity and vice versa) based on your risk tolerance and market performance.
It is prudent to invest in long-term ULIPs in order to achieve reasonable market returns.

The Advantages of Term Insurance and Unit-Linked Insurance Plans

Term plans and ULIPs both have their own set of features. Let's examine how these benefits stack up against one another :

Advantage	Term Plan	ULIP
Cost-Effectiveness	Term plan rates are among the lowest in the industry.	Because a ULIP has a variety of charges, the premiums might be significantly higher than those of term insurance.
Security	If something were to happen to you, the sum assured would be paid to your nominee.	If something were to happen to you, the sum assured would be paid to your nominee. Furthermore, the money invested may generate dividends dependent on market circumstances and assist you in meeting long-term financial goals.
Tax Advantages	Life insurance premiums up to Rs. 1.5 lakh per year are tax-free under Section 80C of the Income Tax Act, 1961. Furthermore, under Section 10 (10D), the death benefit paid to beneficiaries is tax-free.	Section 10 (10D) of the Income Tax Act of 1961 exempts any payments received. Furthermore, you are eligible for tax exemption on premiums paid per Section 80C.
Flexibility	Term plans, however, do not let you invest funds for the future, plus there is no payment if you survive the policy.	ULIPs are accompanied by a variety of investment alternatives such as market funds, loans, and shares, among others. You can choose any of them based on your risk tolerance and other financial factors. You may even swap from one fund to another to maximise your earnings.

The Verdict?

Term insurance policies are the most risk-free option to protect your loved ones' future in the event of your untimely passing. They are especially handy if you want to do so at a cheap cost and for a large sum insured. ULIPs, on the other hand, provide financial options in addition to life insurance. Unlike term insurance, returns on investment allow you to enjoy a maturity benefit while still achieving long-term goals.

Both policies serve distinct functions. Thus, you should not choose one over the other. Including both in your investment portfolio will not only help you protect your family's financial future but will also help you develop a corpus for your retirement and other future requirements. As a result, it's a good idea to augment your term plan with a ULIP or vice versa.

Disclaimer:

Note- IN ULIP POLICIES, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER

Unit Linked Life Insurance products are different from the traditional products and are subject to market risks.

The premium paid in Unit Linked Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions.

Please know the associated risk and applicable charges from your Insurance Advisor or the intermediary or the policy document issued by the insurance company.

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Frequently Asked Questions (FAQs)

What’s a term insurance policy?

Term insurance, as the name implies, offers life insurance for a certain period of time. You have the freedom to pick this duration, which might last anywhere from 5 years to your whole life.

What’s a ULIP?

Is term plan affordable?

Term plan rates are among the lowest in the industry.