Insurance is a legal contract between two parties, insurer (insurance company) and insured (the one who is covered) , where the insured gets financial protection from the insurer against losses insured. For this the insurer has to pay a certain amount every year called premium.
In simple words, insurance is a contract in which an insurer agrees to reimburse the losses of the insured in the event of a contingency.
After understanding meaning of insurance let us now look at the types:
Types Of Insurance
These are two broad categories of insurance:
Life Insurance: Life insurance is a legal contract where the insurer agrees to pay a sum of money to the family members of insured in case of death of insured , in return for the premium paid by insured.
General insurance: General insurance is a contract where financial losses to the assets are covered.General insurance covers the economic losses on any asset on happening of any contingencies.Auto,fire,travel ,marine and miscellaneous are examples of general insurance.
Types Of Life Insurance:
Insuring life is very critical and most important when we want our loved ones to live a peaceful life in our absence.Life insurance is safeguarding the dependents’ future.
Now let us understand different types of life insurance:
Term: Most basic form of life insurance available in the market. Term insurance provides financial coverage for a specific term.During the term, in case of the demise of the policyholder the insurance company pays the beneficiary/nominee a lump sum amount as per the contract.
Whole life: Whole life insurance provides coverage to the policyholder lifelong. The policy is active until the policyholder fails to pay the premium.
Endowment: Endowment plan works with dual benefit of providing coverage and maturity benefit after specified time period.The insured gets sum assured along with the bonuses and guaranteed additions at maturity.
Ulip: Ulip (unit linked insurance plans) are fixed term savings plans with an opportunity of insurance coverage. The returns in ULIP are subject to market performance.The life cover remains till the policy maturity.
General Insurance provides financial contingencies to your assets.These plans provide financial security.
General insurance protects hard earned money in emergency situations.
While few general insurance are mandatory by law, few need to be purchased to get rid of expenditure arising out of contingencies.
Health Insurance:Health Insurance is the insurance that covers surgical and medical expenditure. Health insurance is the only insurance that allows tax rebate.Health insurance has become very important in today’s time to avoid the burden of heavy medical costs.This insurance reimburses all the expenditure because of illness and injury.There are different types of health insurance like group health insurance,family floater and critical illness insurance.
After understanding insurance types and subtypes ,now let us have a look at the taxation part.
Tax Sections In India: (Only for life insurance)
Section 80 ( C ) :
Section 80 ( C ) of income tax act came into effect from april 2006.
It allows specific income and expenditure to be exempt from tax. If you plan your investments wisely and spread them across the tax saving instruments like PPF, Insurance, elss, nps then you can then claim deductions upto 1.5 lakh each year.
This will end up reducing your tax burden each financial year.
Deductions under subsection of 80 ( C )
- 80 (CCC) : Any investment done in insurance plans, pension/ annuity plans is eligible for deductions under section 80 CCC
- 80 (CCD) (1) : Investment in NPS by employee claimable for deduction under section 80 ( CCD) upto Rs.1 lakh each year
- 80 (CCD) (2); Investment by employer in NPS. Claimable for deduction upto 10% of the salary.
Section 80 (D):
Section 80 ( D ) allows for deduction on money spent on health and health insurance and assumes great significance in the tax planning.
- Section 80 (D): Tax deductions upto 25000 in a medical insurance policy purchased for self, spouse and dependents and 50000 for parents above the age of 60.
- Section 80 (DD) : Medical treatment expenditure for handicapped dependents eligible for tax exemption upto 75000 for disability between 40-75% and 1.25 lakhs for disability above 80%.
- Section (80 DDB): The costs actually incurred upto Rs.40000 on the medical expenditure is eligible for tax rebate under this section.
Tax saving Perks Of Insurance:
That’s the beauty of insurance policies, with the dual benefit of investment and coverage it also helps in saving taxes.
- Life insurance plans help save taxes under section 80 ( C ) of income tax act 1961. An individual can claim tax deductions maximum upto Rs. 1,50,000 under section 80 ( C ). Apart from life insurance ,there are many other investments allowed for deductions under section 80 ( C ) Eg.PPF,SSY,NPS,ELSS etc.
- Section 10 10 ( D) states that any amount earned life insurance ,death benefit and the maturity proceeds including bonuses are tax free . Section 10 10 ( D ) defines any investment that is linked with insurance of 10 times of principal paid becomes tax free in the hands of the investor.
- Under section 80 ( D ) of income tax act 1961, health/medical insurance (Categorized under general insurance) is allowed for tax deductions for any individual/HUF. Maximum deduction of RS.25000 is allowed for self, spouse and children. An additional deduction of Rs.25000 is allowed for parents below 60 years of age. For parents above 60, tax deduction allowed is upto Rs.50000.
Other Benefits Of insurance:
- Insurance benefits work on the principle of risk pooling and distributing them to a large number of people.
- Insurance protects you and your account. In case a medical emergency arises, insurance compensates for the medical expenditure.
- Insurance is very important for you to live a worry free life. Life insurance plans are meant to provide a lump sum benefit to the family members of the policy holder incase of his demise.
- Insurance secures your today and tomorrow.Term plans are the purest form of life insurance and endowment plans create wealth along with providing insurance coverage.
- Insurance saves you from withdrawing your savings for an emergency expenditure.
- Life insurance takes care of risk to human life, general insurance on the other hand reimburse all potential losses to an individual’s assets.
- Health insurance saves you from the hefty spending on medical bills.
Insurance can save you from a disaster or unforeseen event which can leave you bankrupt. Insurance provides you with peace of mind, because you know if anything happens there is coverage to take care of the costs.Insurance induces savings habits and allows you to get rid of taxes.
To get detailed information about tax saver insurance plans, visit here!