Investing in Life Insurance Policies is considered to be a good investment module for the common man in India. Not only does it guarantee financial security for your future, but if looked upon in a way it also provides long term capital gains, compared to any other mode of investments. But like other financial modules certain charges are levied on the individual when he/she opts to purchase and invest in the policy. These charges are mostly one time charges and are reduced to a great extent which remains constant during the remainder of the premium paying term and depends on the kind of policy or plan that you opt for. Discussing these important factors in the article will help clear various comprehensions and in the process enable people to be wiser during the investment process.
One primary reason that a salaried class individual in India would want to invest in a Life Insurance Policy is because it’s a major part of tax deduction component. Let us consider the case of an individual whose annual income is taxable and amounts to around 6 lacs/annum. He opts to invest in a policy, where he would be paying a Life Insurance Premium of 50,000/ annum. This amount is directly deducted from his gross salary and the remaining part is entitled to be taxed, until and unless he/she has some other financial commitments such as home loans, Mutual Fund Investments (ELSS) etc, which under the norms of Finance Ministry of India is also subjected to tax-deduction under section 80 C and 80 CCC. This premium amount is paid till a certain period, which we call the Life Insurance Term, and with the completion of the Life Insurance Policy (35-40 years), the sum that was deposited is repaid to the insured along with a certain rate of interest, which depends on the market conditions.
When the payment for the first premium is made, a whole lot of charges is implied on it and deducted from the investment. These charges mostly include Admin charges, service tax charged by the company, processing charges, mortality charges, rider charges and the fund manager charges. The maximum deduction is done in the first year itself where the insurer (Life Insurance Company), charges you around 25-30% of your premium. From the next year onwards the charges are reduced to a great extent with only 2-5% being charged of your premium. This continues till the term you pay the premium. The charges that are made on your premium is a source of income for the insurer, and the income tax is paid through them. So logically speaking the income tax isn’t completely deducted, but paid by the insurance company. On a safer side a individual who has opted for a Life Insurance Policy or a simple Life Insurance Plan (ULIP’s in most cases), could terminate the policy and have the sum returned, though this is possible only after 3 years of the start of the policy. The following illustration will provide hindsight as to how your premium adds up before it is paid to you, or what you get when you opt to close the policy and get back your investment.
Considering that an individual paying a premium of 50,000/ annum and the policy he has opted for is of 35 years (approx). As per charges made by the company 15,000/ at 30% is deducted towards company costs and 35,000/ will be the amount invested. Second year onwards 2500/ @ 5% will be deducted and 47,500 will be deposited. If the rate of interest paid on your premium is 10%, then after the completion of 2 years you will have an amount of, [35,000/ + (10%) of 35,000] = 38,500/ + [47,500 + (10%) of 47,500] = 90,750/, for the third year this will be [90,750 + 47,500+ 10% of 47,500] = 1,43,000/. A customer who would want to stop the policy might consider this return to be a loss, but technically speaking this is a gain as the tax that would have been levied on the 50,000/ that he opted to invest would have been greater than the amount that was deducted. Hence it is advisable that even if you are stopping your policy and taking back your investments, do so after 5 years as it would prove to be beneficial. With numerous Life Insurance Companies launching some schemes or the other in the market every other day, the advent of Life Insurance has really helped set up good financial regulations.
To read more about Life Insurance in detail click here.
One primary reason that a salaried class individual in India would want to invest in a Life Insurance Policy is because it’s a major part of tax deduction component. Let us consider the case of an individual whose annual income is taxable and amounts to around 6 lacs/annum. He opts to invest in a policy, where he would be paying a Life Insurance Premium of 50,000/ annum. This amount is directly deducted from his gross salary and the remaining part is entitled to be taxed, until and unless he/she has some other financial commitments such as home loans, Mutual Fund Investments (ELSS) etc, which under the norms of Finance Ministry of India is also subjected to tax-deduction under section 80 C and 80 CCC. This premium amount is paid till a certain period, which we call the Life Insurance Term, and with the completion of the Life Insurance Policy (35-40 years), the sum that was deposited is repaid to the insured along with a certain rate of interest, which depends on the market conditions.
When the payment for the first premium is made, a whole lot of charges is implied on it and deducted from the investment. These charges mostly include Admin charges, service tax charged by the company, processing charges, mortality charges, rider charges and the fund manager charges. The maximum deduction is done in the first year itself where the insurer (Life Insurance Company), charges you around 25-30% of your premium. From the next year onwards the charges are reduced to a great extent with only 2-5% being charged of your premium. This continues till the term you pay the premium. The charges that are made on your premium is a source of income for the insurer, and the income tax is paid through them. So logically speaking the income tax isn’t completely deducted, but paid by the insurance company. On a safer side a individual who has opted for a Life Insurance Policy or a simple Life Insurance Plan (ULIP’s in most cases), could terminate the policy and have the sum returned, though this is possible only after 3 years of the start of the policy. The following illustration will provide hindsight as to how your premium adds up before it is paid to you, or what you get when you opt to close the policy and get back your investment.
Considering that an individual paying a premium of 50,000/ annum and the policy he has opted for is of 35 years (approx). As per charges made by the company 15,000/ at 30% is deducted towards company costs and 35,000/ will be the amount invested. Second year onwards 2500/ @ 5% will be deducted and 47,500 will be deposited. If the rate of interest paid on your premium is 10%, then after the completion of 2 years you will have an amount of, [35,000/ + (10%) of 35,000] = 38,500/ + [47,500 + (10%) of 47,500] = 90,750/, for the third year this will be [90,750 + 47,500+ 10% of 47,500] = 1,43,000/. A customer who would want to stop the policy might consider this return to be a loss, but technically speaking this is a gain as the tax that would have been levied on the 50,000/ that he opted to invest would have been greater than the amount that was deducted. Hence it is advisable that even if you are stopping your policy and taking back your investments, do so after 5 years as it would prove to be beneficial. With numerous Life Insurance Companies launching some schemes or the other in the market every other day, the advent of Life Insurance has really helped set up good financial regulations.
To read more about Life Insurance in detail click here.