Life Insurance (Surrender, Paid Up value, Tax Benefits, types & comparison)

What is life insurance?

An agreement between the company and policyholder that guarantees compensates loss based on the premium paid by the policyholder.

 

life insurance types

Endowment Plans: Guarantees the Premium if the person survives till the maturity they will pay Premium paid towards sum Assured along with Bonus it not less than FD and other investments. (towards 4%)

Term Policy:  Pay for life coverage for certain periods 5,10,15,20 if the person survived till the maturity no amount will be paid.

Health policy: valid for 1-year illness coverage under networked hospitals by the insurance company.

Personal Accident Policy: validity 1 year

Money back: assist some kind of withdrawal based on term

Whole Life: covers the whole life after the maturity

ULIP (Unit Linked Policy):  Some portion of premium invested in Stock market returns depends on market conditions.

Annuity/ Pension Plan: No capital Appreciation maturity: After maturity Based On Insured person either it paid by lump sum or Annuity every year certain amount)

 

Taxation on Life insurance Policies

the Premium You Paid (Only up to 10% of Sum assured Ex: 10 Lakh policy your yearly premium should be below 1 lakh) to insurance policy upto 1.5 Lakh exemption under 80C,

 

is lic maturity amount tax-free?

Maturity Exemption under Section 10(10D) if premiums paid towards Sum assured in a year not more than 10% of Sum Assured also knowns as policy value. (if policy issued after 2012)

Ex: sum Assured 10 lakhs then your yearly premium would be below 1 lakh. refer section Section 10(10D) * for conditions.

Section 194DA of the Income Tax Act, 1961

2% TDS, (1% after 2016) .

which are not exempt under section 10(10D) equals or exceeds Rs. 1 lakh in a financial year

after computing income, if your yearly return tax payable nil or low. then your TDS Will return to your bank (banks must be added in ITR to credit TDS).

GST applicable on premium payment 1st year 4.50 %, 2nd year onwards 2.25%.

NOTE: if lump sum one-time payment policy premium reaches 10% of SumAssured that;t not eligible for exemption.

Income Tax under Section 10(10D):  after 2012 onwards if the premium towards your sum assured not exceeded 10% (this will have happened in case of policy lapse or surrender). then Maturity amount or Bonus payment exempted.

IS LIC Annuities taxable?

Yes, Annuities are Taxable. (Mostly buy with lumpsum money to get annual pension)

know the difference between annuity & life insurance policy.

Policy lapse vs surrender

Grace Period:  days after the premium due date to make the premium to avoid a policy lapse. 

Generally 30 days after the Premium due date.

 

lic Policy lapse: If You discontinued paying the premium within 3 years then you will lose your money.

Revive policy lapse:  Paying Unpaid Premiums & along with interest with the good medical report under form no 680.

Policy Surrender Value

: If the premium paid up to 3 years, then you unable continue the policy, then your premium amount

calculated after deducting some charges/penalties called as Surrender Value (immediately pays you).

Calculating the Surrender Value:

30% premiums paid, excluding the first year premium

Ex:   10 laKhs policy (Sum Assured)

you paid 40 Annually up to 3 years total 1.2Lakhs

120K-40K= 80K

30% of 80,000= 24,000 (you paid 1,20,000 and got 24,000)

30% premium paid excluding 1st-year Premium.

Paid up value:

in case of surrender, the sum assured reduced sum amount called paid up value and pays on maturity or death claim.

multiplying the sum assured and the ratio of the premiums paid to  premiums payable

SUM Assured * No of premium paid /No of Premium payable

Ex:  10Lakhs * 3 (years/13 (years)

10,00,000*4/12=333333

+ Bonus should be added and pays at maturity or at the death.

Paid-up value details
Sum Assured 1000000
Premium Paid 4 out of 16 years
Paid-up Sum Assured 250000
Accrued Bonus (Approx.) 0
Paid-value at the completion of the term (2032) (Approx.) 250000

Note: calculations illustration purpose only* (actual values definitely varies)

What is the difference between the surrender value and paid-up value?

The paid up value will be paid out at maturity or on death claim.  You will make losses if you surrender the policy, as the guaranteed surrender value will be equal to 30% of the total amount of premiums paid the minus first-year premium.

Peronsal Accidents vs Term vs Edoment insurance

Endowment Policy Vs Term & Mutal Funds

Plan type	coverage	Premium annual	Duration	Accumulated Amount	CAGR
Term+MF	50 lakh	7000(43 in MF)	10 years	10.61 lakhs	15.96%
ULIP	5 lakh	50,000	10 years	9.61 lakhs	10.78%
(Endowment)LIC Jeevan Anand table (419)	4 lakh	50000	10 years	7.25 lakhs	6.66%

 

LIC Bonus 45 for 1000 (historical)*  (4.5% for 100 INR nearly saving bank interest and Inflation rate 4* (or 6 then lower than the actual amount we invested with savings. So Don’t; Mix Insurance with Investment it leads to lower returns.

Section 10(10D)

Not applicable in 4 scenarios

1. insurance by the employer, keyman
2. sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA;
3. more than 20% Annual premium policy after 2003 to 31st March 2012.
4. More than 10% annual premium policy after 2012 April 1st.

The premium payable any of the year Not More than %* of Sum Assured

20% Policy Issued after the 1st day of April 2003 and on or before the 31st day of March 2012.

10% Policy issued after April 2012 (make sure the sum assured is at least 10 times the premium amount)

15% in the case of Disability of the person (80U, 80DDB) policy issued after 2013.

2% TDS (1% after 2016) (with Pan) (20% without PAN) Deducted on Maturity if Section 10(10D) not applicable.

In the case of Death of policyholder, nominee received amount tax-free.(rule 3 & 4 Scenario)