Can I Deduct The Cost of Life Insurance On My Taxes? Investing in a wide range of instruments that qualify for these deductions and exemptions is available to taxpayers. The deadline to invest in tax-advantaged vehicles is March 31, 2020.
Term insurance is one such tax-saving tool. Aside from the tax benefits of term insurance, policyholders also receive solid life insurance coverage for their families and can live a stress-free life in the long run.
Term insurance is a type of insurance that covers you for a specific period of time A term insurance plan, as the name implies, is a policy that lasts for a set period of time. It provides you with a substantial sum assured at a reasonable premium charge. The sum assured is payable to the policyholder’s nominee if the policyholder dies during the policy period.
Can I Deduct The Cost of Life Insurance On My Taxes?
In most cases, you won’t be able to deduct your life insurance premiums on your tax returns. Most of the time, the IRS considers your insurance payments to be a personal expense, similar to food or clothing. You won’t get a tax advantage if you buy life insurance because it isn’t mandated by your state or federal government.
If you pass away while your policy is still valid, your loved ones will get a tax-free cash payment to replace your income, settle bills or obligations, save for the future, or buy whatever they like (read on for more details on the tax advantages of life insurance).
While you typically can’t deduct premiums, there are several exceptions. You may be able to deduct some or all of your life insurance premiums if you:
- Have a business and offer benefits. Certain business types, like LLCs, S Corporations, and sole proprietors, can deduct premiums they’re paying on behalf of employees. If you own a small business that qualifies for this deduction, you can only deduct premiums for up to $50,000 of coverage.
- Have an older alimony agreement (pre-2019). The Tax Cuts and Jobs Act permanently altered tax codes for post-2018 alimony agreements. When you file for divorce, the judge in charge of your case may require you or your partner to buy life insurance as part of the alimony agreement. Due to tax code changes, no alimony payments, including life insurance payments, will be considered tax deductible if your agreement was made after December 31, 2018. Also, you won’t be able to deduct premiums from policies you purchased before the divorce that name your ex-spouse as the beneficiary.
- Give a policy as a charitable gift. Transferring ownership of a policy is often an advantage at tax time. If you plan to give your life insurance policy to your favorite charitable organization or name the charity as your beneficiary, you can receive a tax benefit. As a charitable gift, the premiums you paid into the policy or the policy’s overall cash value, whichever is less, is considered a tax deduction.
Depending on your situation, there may be other exceptions that apply to you. To learn more about how life insurance policies affect your taxes, talk to your accountant or a tax professional familiar with your circumstances, so they can advise you on your options.
What Are The Tax Benefits Under Life Insurance Policy & Payout?
The single, most important role of a life insurance policy is to provide a death benefit to the policy holder’s nominees. The death benefit is the sum assured under a policy and paid to the registered beneficiaries in case the unfortunate happens during the policy tenure. The death benefit is mostly paid out after the claim is registered, helping them carry out their day to day expenses.
Apart from providing financial security to your loved ones, the other great benefit of a life insurance policy is the deduction from the Total income of the premiums paid. However, most people are not aware that a term plan offers tax benefits on the death benefits received too.
Tax benefit on the benefit payout received
The sum received as death benefit under an insurance policy is fully exempt from tax under Section 10(10D) of the Income Tax Act. In other words, the proceeds from the insurance policy are tax-free.
While normal term insurance plans pay the death benefit during the policy tenure, there is a return of premium term plan that refunds the premium paid after maturity, when the insured survives through the policy term. Even this premium refund is treated as tax-free under Section 10(10D).
The death benefit received under the following circumstances would not qualify for an exemption –
- Any benefit received under Section 80 DD(3) or sub-section (3) of section 80DDA
- Any sum received under a Keyman insurance policy
Term insurance income tax benefit under Section 80C
Section 80C of the Income Tax Act is the most popular tool used for tax-saving by individuals. This Section offers a maximum deduction of Rs.1.5 lakh for all the listed investments and instruments put together. It includes a number of instruments like PPF, EPF, ULIP, ELSS, and payments like repayment of home loan, children’s tuition fees, life insurance premium, etc.
Under this Section, the premium paid for a term life insurance is also eligible for deduction up to Rs.1.5 lakhs (total of all investments and payments under this Section). The conditions to avail term insurance tax benefit under Section 80C include:
- The yearly premiums paid should not exceed 10% of the sum assured. If the premiums do exceed 10%, deductions will be applied proportionately.
- For policies issued before 31st March 2012, the deduction will be applicable only if the yearly premium does not exceed 20% of the sum assured.
- As per Section 80C(5), in the case of a policy that is voluntarily surrendered or terminated before two years from the beginning of the policy, the policyholder won’t receive Section 80C tax benefits on premium payments.
Term insurance tax benefit 80D
Traditionally, Section is reserved only for health insurance policies. If offers a deduction on health insurance policies taken for self, spouse, children, or parents with different deduction limits under different conditions.
However, certain term plans can also avail the tax benefits under Section 80D. Policyholders who have opted for a health-related rider (such as Critical Illness, Surgical Care, Hospital Care Rider) with their term insurance policy, can also avail deductions. Conditions for term insurance benefit 80D include:
- Deductions under Section 80D can be availed for an amount that doesn’t exceed Rs. 25,000.
- If you have taken an insurance policy for your parents, you can avail additional deductions of Rs. 25,000.
- If your parents are senior citizens, the deduction limit goes up to Rs. 50,000.
Term insurance tax exemption under Section 10(10D)
As per Section 10(10D) of the Income Tax Act, the sum assured received on maturity or surrender of a policy or upon the policyholder’s death is completely tax-free. Bonuses received with such amount are also exempt under Section 10(10D).
Conditions for term insurance tax exemption under Section 10(10D):
- Term plan tax benefit under Section 10(10D) is applicable if the premium is less than 10 percent of the sum assured or the sum assured is at least 10 times the premium.
- If the payout exceeds Rs.1,00,000, and the policyholder’s PAN is available to the insurer, a TDS (Tax Deducted at Source) of 1% is applied.
In order to avail all the tax benefits that come with a term plan, Canara HSBC Oriental Bank of Commerce Life Insurance’s iSelect Star Term Plan proves to be a lucrative option. Policyholders can take their pick of the various riders available – Accidental Death Benefit, Accidental Total and Permanent Disability Benefit or even the Child Support Benefit.
They can also customize their payout options and choose to receive their payout in the form of a lump sum, a monthly income or a part lump sum-part monthly income. They choose from 3 plan variants, which, each, offer unique benefits like return of premiums, spousal cover and more. Thus, in addition to tax benefits, policyholders can benefit from a whole bunch of advantages by opting for a term plan.
Are there any situations when the beneficiary might still have to pay tax?
One such situation where the benefit amount may attract tax is when the policyholder chooses not to have the benefit paid out immediately. In this case, the amount is held by the insurance company until paid out, and the amount is paid out after a period of interest accumulation. This accumulated portion of interest is usually liable to taxes.
Who is eligible to claim Term insurance premium tax benefit?
Tax benefits on term insurance can be claimed by individuals and Hindu Undivided Family (HUFs) by claiming deduction on the premiums paid for a term insurance policy.
WHAT IS A TAX DEDUCTION?
A tax deduction is a line item on your annual tax return that may lower your taxable income. There are certain, qualifiable tax credits or benefits that you can claim on your taxes to receive a bigger refund from the IRS.
For example, when you donate household items to a local thrift store, the organization may ask if you want a receipt. This receipt would allow you to write off the value of these items on your tax return as tax-deductible, which means you can subtract their value from the overall amount that you owe to the government or add them to the amount that the government owes you.