If you wish to buy life insurance anytime soon, you should first take a closer look at taxation changes as announced in the 2023 Union Budget. Since there are various kinds of life insurance plans, the taxation changes may or may not impact you, depending on what you have chosen. This article takes an all-round view of these taxation changes as confirmed by the Budget for the current fiscal.
What are the taxation changes for insurance?
The 2023 Union Budget has announced a few changes with regard to the BFSI (banking, financial services, and insurance) industry. Union Finance Minister Nirmala Sitharaman has announced taxation for high-value life insurance policies (with the exception of ULIPs or unit-linked insurance plans) purchased after the 31st of March, 2023. Now, what are these high-value life insurance policies? These are plans where the annual premium amount exceeds Rs. 5 lakh. This makes it imperative for you to use a life insurance premium calculator to understand the annual payable amount for your chosen coverage.
Before the announcement was made in the Budget, customers could get tax exemptions on their income from these policies. Yet, the new rules will only apply after the 31st of March, 2023, and not for policies purchased before this date. At the same time, proceeds resulting from death claims will always be tax exempted, irrespective of the premium amount. They will be tax-free in the hands of the beneficiaries or nominees of the deceased policyholder as per the Budget.
Examining These Changes From An All-Round Perspective
These tax changes for life insurance can be examined from several angles. Here are some pointers that you should remember in this regard:
- In the 2021 Union Budget, the Union Finance Minister eliminated tax exemptions for maturity proceeds from ULIPs where annual premiums surpassed Rs. 2.5 lakh. She also chose to make the interest taxable for all annual contributions to the EPF (Employees’ Provident Fund), which crossed Rs. 2.5 lakh. Yet, despite these measures, exemptions stay intact for maturity proceeds as per Section 10 (10D) and can be availed for policies where the premium amount is lower than 10% of the sum assured.
- At the time of the 2023 Union Budget, the Union Finance Minister chose to limit the benefits of traditional life insurance. Sales of these policies, including money-back and endowment plans, have skyrocketed exponentially over the last few years. Several HNIs (high net-worth individuals) are already looking at such solutions for locking their returns without getting over-exposed to market volatility. They were also eligible for getting tax exemptions on this income. According to the Union Finance Minister, this was a loophole, which has now been filled up.
- The decision has a few insights for life insurance companies as well. Many of them were packaging these policies as attractive investment propositions with life coverage, although they were not ULIPs. Hence, life insurers need to know that investments and insurance are different propositions (unless it is a ULIP) and should be perceived by buyers as such.
- You should not buy life insurance with annual premiums above Rs. 5 lakh in order to meet the 31st March deadline. Do it only if your needs are met with sizeable coverage. Even when the insurer offers widespread tax-saving benefits with these policies, you should only finalize your purchase if your future goals and specific objectives are fulfilled. Do not invest only in the hope of getting lucrative tax-free returns. Also, consider whether you will be able to pay the premiums without any defaults/problems, considering economic fluctuations and other needs that might crop up in the future, including sudden and unexpected expenses.
These changes are something that you should closely evaluate before investing in life insurance. You should broaden your insurance coverage or safety net as per experts. You can choose pure term insurance coverage and boost the same with helpful riders like accidental disability and critical illness. You should also avoid neglecting health insurance which is imperative for you and your family members. Personal accident insurance, automobile insurance, and home insurance are other must-haves in your portfolio.
Coming back to life insurance, you should consider term plans and other options like ULIPs (unit-linked insurance plans), which combine investments and insurance. You can also choose endowment plans or pension plans, depending on your needs. If you are looking at specifically securing the future of your child, then the life insurance segment also has child plans available for your perusal. Make sure that you prioritize your coverage amount above everything else since you do not want to be underinsured. Always calculate coverage by adding projected monthly costs (inclusive of inflation), future goals of family members, and your liabilities. For ULIPs, estimate your premium and whether you can afford the same or not. Also, choose the funds carefully for investments via ULIPs. Here’s to a financially secure future for your family with suitable insurance coverage.