Building a good investment portfolio is indispensable for the future. Most people will agree with this statement unless they already have a solid asset base to fall back on. A good portfolio not only helps you live comfortably after retirement and meet your financial and life goals but also ensures tax efficiency across the board.
In this context, most financial advisors recommend investing in life insurance policies to ensure this tax efficiency for your portfolio while financially safeguarding your family from unexpected life situations. This article deals more with how insurance is vital to any tax-efficient portfolio.
Term insurance- Why it should be a part of your portfolio
If you are going to get a life insurance plan for the first time, you can consider buying an online term plan. So what is a term plan? It is a pure form of life coverage where you can secure your family’s financial future.
Here are the salient features of term plans:
- You get life coverage for a certain amount, called the sum assured
- You also choose the duration of the policy, also known as term
- You pay premiums regularly to keep the policy active and the coverage intact
- The life insurance company pays your nominees this sum assured or death benefit in case of your unfortunate demise within the policy period
- If you survive the policy tenure, then there are no payable benefits
- You can also choose term insurance plans with return of premium provisions. After deducting applicable charges, the premiums paid throughout the policy tenure are refunded to you by the insurance company at maturity, provided you survive the period. The death benefit clause remains the same as in regular-term insurance plans.
Now, what about tax efficiency? An online term plan will get you tax benefits through deductions and exemptions. You can get deductions from your gross taxable income up to Rs. 1,50,000 under the old tax regime for the premiums you pay for your term insurance plan, as per Section 80C.
At the same time, there are exemptions on the death benefits paid to nominees as per Section 10 (10D) of the Income Tax Act. Death benefits are always tax-free in the hands of the nominees.
In contrast, the maturity benefits, if applicable to the policy, will be tax-free if the annual premium does not surpass 10% of the sum assured. You can also scale up your tax benefits from term insurance plans with suitable riders.
Adding critical illness or any other health rider, such as hospital care, surgical care, and others, will help you get extra deductions under Section 80D on your premium payments. This is up to Rs. 25,000 for those less than 60 years of age (self, spouse, and children). It may increase by another Rs.
25,000 if you are paying premiums for your parents’ critical illness rider (if they are below 60). If the policyholder is above 60, the deduction will increase to Rs. 50,000.
This is how term insurance helps you keep your portfolio tax-efficient while ensuring basic financial security and peace of mind alike. What about some other insurance plans in this regard? Here’s taking a look at the same.
ULIPs and other insurance plans
Your portfolio can include Unit Linked Insurance Plans (ULIPs), which combine life coverage and investments in market-linked instruments. The premium is invested in funds of your choice after deducting applicable charges.
Depending on your life stage, risk appetite, and market movements, you can switch funds periodically to safeguard or scale up your returns. ULIPs come with 5-year lock-in periods and are not only helpful for future wealth creation with inflation-beating returns but are also tax-efficient.
The premium payments will get you the same deductions up to Rs. 1,50,000 under Section 80C of the Income Tax Act. This comes as a breather since the earnings from ULIPs with yearly premiums over Rs. 2,50,000 are otherwise taxable as capital gains in your hands.
However, death benefits, if applicable, will be exempted from taxes. Guaranteed Return Plans offer similar tax deductions and exemptions under Section 80C and Section 10 (10D). They can ensure handsome earnings along with life coverage as well.
Health insurance plans are a modern-day necessity and get you tax benefits under Section 80D, as mentioned above. Hence, life insurance is a great way to streamline your tax benefits and make your investment portfolio more tax-efficient.
At least the basics, i.e. life and health insurance, are a must before you come to ULIPs and other wealth-generating plans. Talk to your financial advisor and get started on building your portfolio today. The earlier you start, the higher your benefits from multiple standpoints.