Resist The Life Insurance Push This Tax Season; Buy It If You Need It

Insurance should be purchased based on one's needs rather than to save taxes
Resist The Life Insurance Push This Tax Season; Buy It If You Need It

With Budget 2023 taxing proceeds from insurance policies with a premium of Rs 5 lakh or more, agents may push insurance policies with renewed zeal this tax season. Understand your protection need before buying life insurance.

The proceeds received from policies other than ULIPs, of over Rs 5 lakh will be taxable under “Income from Other Sources”. As per the newly introduced rule, income from only those policies with an aggregate premium up to Rs 5 lakh shall be exempt. The threshold of Rs 5 lakh will apply to multiple policies of the individual. This proposal will not impact the taxation of unit-linked insurance plans (ULIPs), term insurance, and existing policies.

What It Means For You

Though this rule applies to everyone, this move will affect only a small number of investors. Some insurers have stated that investors with premiums of Rs 5 lakh make up 8-12 per cent of their overall portfolio. As a result, I don't expect to see any changes for investors who have smaller ticket sizes. “This move may also be a blessing in disguise, as it may encourage investors to purchase term plans, which are essential in any portfolio,” says Rakesh Goyal, director, Probus Insurance broker.

Should You Buy Insurance Policies Before Tax Kicks In?

Even today, many investors purchase insurance policies to save money and receive tax breaks. However, before making a purchase decision, it is important to understand why insurance is required.

Life insurance has to be purchased for the benefit of securing one's life goals. “We have always advised anyone who is looking to purchase life insurance to first analyze their long-term life goals and then purchase insurance appropriately,” says Bharat Kalsi, Chief Financial Officer, Bajaj Allianz Life Insurance.

Insurance should be purchased based on one's needs rather than to save taxes. They can consider buying the policy if there are gaps in their insurance needs.

Says Arijit Sen, a Sebi-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm: “As a Sebi Registered Investment Advisor, I believe that the approach to consider life insurance as savings or investment or tax savings tool is fundamentally wrong. The chief purpose of taking life insurance is to ensure the family's financial security in case of bread earner's untimely death." Thus, it doesn't make sense to rush and buy insurance products without understanding your needs before the tax rule gets underway.”

“The announcements made in the budget towards capping tax exemptions of these premiums are being analyzed. However, we will continue to advise our customers to look at the overarching benefits of insurance rather than purchase it only from the tax benefits perspective,” says Kalsi.

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