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A policeman stopped a person who was about to jump from the bridge and asked him the reason for the drastic step. The person said he was an insurance advisor and took nearly fifteen minutes to explain why life is not worth living. Suddenly a crowd gathered to see both the policeman and the insurance advisor jumping from the bridge together. Such is the power of persuasion of an insurance advisor.

It is important that you fully understand the details before buying an insurance policy and take one that works best for you. Here are certain things you should be aware of, particularly relating to the tax benefits. There are two-pronged tax benefits on insurance policies - by way of a deduction under Section 80C in respect of premium paid, and on the money received from the insurance company with accumulated bonus, which is tax free under Section 10 (10D). However, there are certain fine points that need to be taken note of.

You are entitled for tax benefits for premium paid only if the insurance policy covers your life, your spouse's or child's life. As a parent you can claim the income tax benefit on the premium paid on the life of your child even though the child is not dependent on you. But if you pay insurance premium on the life of your dependent parent, then you cannot claim the benefit of Section 80C.

What is the maximum limit for claiming tax benefit in relation to premium paid? In case you pay more than 20% of the sum assured as premium for any of the years during the term of the policy, then the tax benefit under 80C is not available. Say you have taken an insurance policy for a sum assured of Rs 1 lakh and the yearly premium in respect of this policy is Rs 21,000, then the entire premium paid will not be available for deduction under Section 80C. You will only get the deduction of Rs 20,000 and the excess of Rs 1000 will be ignored.

Now, let us look at the tax aspects of the monies received. Any money received in respect of a life insurance policy together with the accumulated bonus is exempt from income tax under Section 10(10D). However, money received onyour insurance policy together with accumulated bonus in respect of life insurance policy issued after 1st April, 2003, will be fully taxable if the amount of premium payable on the policy is more than 20% of thesum assured for any of the years during the term of the policy as explained above. (For example, if you have a policy for a sum assured of Rs 1 lakh and the premium is Rs 8,000, Rs 12,000, Rs 16,000, Rs 20,000 and Rs 24,000, respectively, for first five years, since the premium for the fifth year is more than Rs 20,000 (20% of the sum assured), then the entire money received on this insurance policy together with the accumulated bonus will not get Section 10(10D) benefits. But any money received on deathof the person insured will be taxfree even if the premium for any of the years is more than 20% of the sum assured.

In case of traditional life insurance policy, you are entitled for all these benefits only if premium in respect of two years has been paid. For Ulips, the policy should remain in force for at least five years. It is important to know that if the policy is terminated or allowed to lapse (before 2 years for traditional life insurance or 5 years for Ulips), then aggregate of all the deductions allowed in earlier years will be added to the income of the year in which the policy is terminated or allowed to get lapsed for non-payment. For example, consider a person who had taken a Ulip of Rs 5 lakh, paid a premium of Rs 50,000 for the first two years and claimed Section 80C benefits for it. However, for some reason he could not pay the premium and allowed the policy to lapse. The aggregate deduction of Rs 1 lakh allowed in the first two years will be withdrawn and it will be treated as income of the third year (when the policy lapsed). Thus, properly studying an insurance policy you have taken will benefit not only your heirs but also benefit you while claiming tax benefits. But you must ensure proper and timely payment of premiums to reap the real fruits of your harvest.

Source: http://digital.dnaindia.com/