GST And Insurance: How The New TAX Laws Affect Your Term Insurance Plan

Family and Life Insurance

While Govind had always known that investing in an insurance policy would help him earn tax benefits, he had long wondered about its viability.

His father had long ago pressed upon the need to avail insurance at the earliest in order to begin earning tax exemptions early on in life. However, with the implementation of the Goods and Service Tax (GST), he was a little apprehensive about whether tax benefits would continue or how they would change.

Post-GST rates have pushed tax paid on premiums from their earlier 15% to 18%. The GST on term insurance premiums has certainly made payment of premiums more expensive but has not impacted term insurance plans in any other way.

While different GST rates apply for different kinds of insurance and investment policies, GST on term insurance premiums are uniformly 18%. The implementation of GST has raised prices for both existing and new policyholders.

While earlier for payment of every Rs. 100 towards the premium included a service tax of Rs. 15, the updated GST on term insurance has raised this to Rs. 18. Thus, premiums will increase by 3%.

Amounts paid towards premium for term life insurance policies are subjected to tax benefits, under Section 80C of the Income Tax Act, 1961.

Moving forward with GST rates implies that the total premiums paid, which include the cost of the basic premium and the GST on term insurance premium, are subject to tax deductions. A deduction of Rs. 1.5 lakh can be claimed each year on the premiums paid, which will now be inclusive of the GST paid as well.

Furthermore, the death benefit payout to the nominees is also fully exempt from taxes, under Section 10(10D) of the Income Tax Act, 1961. This allows for the provision of a bigger corpus for nominees, post the policyholder’s death. This is especially important if the policyholder was the only breadwinner in the family.

Thus, term insurance policies continue to be a beneficial tax-saving instrument. Read on to learn about other benefits of term life insurance policies.

Death Benefit:

The death benefit is the foremost advantage offered by term insurance plans. Term plans are defined as “pure” insurance options since they provide a death benefit to the nominees. The death benefit is a lumpsum amount paid out to the nominee upon the death of the policyholder, and this amount can come handy in a lot of cases.

Income Benefit:

A policyholder may often be the sole breadwinner of their family. In such cases, availing a term life insurance policy is of even more vital importance to them than others. Term insurance policies, however, often offer an income benefit to policyholders for the benefit of their nominees post their death.

Under an income benefit, the nominees receive a certain fixed amount on a monthly basis for a certain period of time post the policyholder’s death. This allows the family to stay on their feet while they figure out new ways to make ends meet.

No Diversion of Premiums:

There are different kinds of insurance available in the market today. Some of them, such as Unit Linked Insurance Policies (ULIPs) act as a combination of both investment and insurance; and enable policyholders to enjoy the benefits of both.

The premiums paid on ULIPs are utilized not just for compounding the policyholder’s corpus, but also for investing in market instruments that can help them increase their corpus. However, with a term insurance plan, there are no such additions unless a rider has been opted for.

This means that every amount placed into a term life insurance policy will only go towards ensuring the benefits of nominees once the policyholder is dead. This allows for a high corpus, which is handed out to the nominees as the death benefit.

Cheaper Premiums:

As noted above, all the premiums paid towards availing a term life insurance policy are strictly focused on building the corpus to provide a death benefit to nominees. Since the premiums paid on term insurance are not diverted towards any other insurance or investment instrument, it is possible to avail term insurance at very low premiums.

GST on term insurance premiums has definitely increased the cost of premiums paid, but it has also maintained the simplicity associated with term insurance plans. The Future Generali Flexi Online Term Plan allows for a payout of Rs. 1 crore with premiums, starting for as little as Rs. 16 per day.

Not only does the plan offer an Income Benefit along with the death benefit promised to nominees, but it also allows policyholders to choose to increase income protection which can significantly benefit their nominees.

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