Expert Zone

Straight from the Specialists

Tax breaks only if insurance cover is 10 times annual premium

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(The views expressed in this column are the author’s own and do not represent those of Reuters)

Tax exemption under Section 80C is one of the major drivers of insurance sales. In fact, it has become a trend to launch a new variant of single-premium plans in February-March to cater to those who just want to make some investment to avail tax benefits.

Budget 2012 set the cat among the pigeons when it mandated that to be eligible for tax exemptions, the cover provided in the life insurance product should be at least 10 times the annual premium paid. In fact, the recommendation was to make it 20 times the annual premium paid. While this seems to be the obvious thing to do considering it is an “insurance” product, a large number of life insurance plans actually provide cover only up to five times the annual premiums paid — and these are money spinners for insurance companies. The higher this multiple, the higher the insurance company would need to set aside as mortality charges and lesser would be the investment component.

Simple term insurance plans which are the best form of life insurance, and a must for every individual, provide a much higher cover multiple and hence do not get affected by this. A large number of non-term plans like money-back, child, endowment, ULIPs and single-premium plans would be affected by this though. Apart from insurance companies, there are three sets of customers who would also find this unattractive.

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