What is insurnace - How to save tax by investment in insurance policies and mediclaim policies

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What is Insurance ? Various types of insurance policies available in India. How to make best use of investments in insurance policies to save tax. How much tax rebate available under Mediclaim policies.

Q1. What is Insurance: Insurance is a contract between the insurer and the insured wherein against receipt of certain amount, called premium, the insurer agrees to make good any financial loss that may be suffered by the insured, due to the operation of an insured peril on the subject matter of insurance.

Q.2 : Why People Opt for Insurance?

The Life is full of uncertainties.. People opt for insurance purely for the reasons of uncertainties in life. Insurance gives the insured a kind of peace of mind as he is assured to making up the loss in the event of such uncertainities in life happen.

Q.3 How does Insurance work?

Insurance is a technique wherein a number of people, who are exposed to similar risk, participate in the scheme and contribute in the shape of periodic premiums. Such premiums are received by the insurer who is able to pay out of the premiums received by him, for the losses of some of those who have participated in the scheme.

Thus it is wonderful technique of spreading and transfer or risks.

Q 4 : What are the Main Types of Life Insurance Policies available in India?

Type of Insurance Policy	Advantages	Disadvantages	Remarks
Whole Life Policy	Whole life policies usually provide protection throughout life. If the policyholder dies, it provides a financial cushion for the kith and kin. In case of simple whole life policy requires one to pay regular premiums throughout one's life. An assured sum is paid out either on death or survival till a pre-determined age. Whole life policies expire at age 100. A few expire early say 85 years of age. In such case, if policy holder survives up to age 85, he / she will get back the sum assured and accrued bonuses.	The premium on these polices is higher than the pure Term Policies (discussed below). Returns are normally lower than ULIP An endowment plan (discussed below) allows you to enjoy the benefits of your savings, but in case of whole life polices one leave a legacy behind for his / her loved ones.	It is better to take this Policy at an early age so that you can remain insured for life. In such a case, this Policy will act as a pension plan as well as a legacy instrument. It will be better if you can have provision for increasing sum assured by way of top up at a later date.
Endowment Plans	Low risk and low return. Hard to think of any.	There are better ways to insure yourself and invest!	Good for children's needs where a certain sum is required at the end of a certain period. Allied with a payor rider or waiver of premium, this is useful
Pension Plans	These Policies are designed to provide annuities during the old age. However, there are no specific advantages of these policies	In the old system, these Policies had tax advantage as the investments in these Policies allowed tax rebate over and above Rs.1,00,000/-. However, now there are no additional tax advantage as the investments in these Policies has been been clubbed with the rest of the investments under Section 80C.	These are slowly loosing the shine and you may not consider investing in these Policies.
Single Premium	Under these Policies the premium is paid in single installment. Suitably for those who have large funds and do not have any other good investment avenue. It acts more like a fixed deposit with small advantages of insurance.	Income tax rebate benefits is of no use for these policies as in case the premium exceeds 20% of sum assured, the maturity proceeds are subject to tax.

Term

These are pure insurance policies and premium outflow every year is much smaller and one can go for higher amount of insurance.

In these policies the premium paid is not returned. These policies are similar to vehicle insurance or house insurance policies where premium paid is not returned.

ULIP

Originally these were launched by UTI only, but now other insurance companies too offer the same and is quite popular policy. It allows one to get insurance and invest their savings in equity and debt market. flexible investment with a choice of funds from secure to growth. Choose from low risk and returns to high risk and high returns. Allows loan and withdrawal of units in times of need

These schemes work more like mutual funds and thus have higher risk of lower returns. The sum assured under these policies is also low

It is advisable to go for long term policies as only such cases the returns can be reasonable as volatility in the capital market sometimes severely affects these schemes.

Some Tips :

Before taking any investment you should be clear as to the objective you wish to achieve through such investments.
In case you objective is pure insurance, you should opt for term policies where premium is low but sum assured is quite high. Be prepared to loose your premium if you survive the term period.
Go for ULIP policies if you aim to have pure investments and wish to invest like mutual funds with some amount of insurance

Some Comparisons :

WHOLE LIFE POLICIES	TERM POLICIES
Whole life policies provide protection throughout life. If the policyholder dies, it provides a financial cushion for the kith and kin. A simple whole life policy requires you to pay regular premiums throughout your life. An assured sum is paid out either on death or survival till a pre-determined age.	In a term plan, you do not get any survival benefits as you pay only for life risk. It expires with the term. Some policies return the premiums paid. But the premiums for these policies are higher than plain term plans.
A whole life policy has an element of savings built into it.	A term policy provides pure life cover.
You pay higher premiums for a whole life policy,	You pay LOWER premiums for a TERM policy,
The higher premiums are invested and the returns flow back in the form of bonuses if it is a participating whole life policy.	Bonuses are not declared for a term policy. Even the premium paid is not received back if you survive the term period.
You can take a loan from your whole life policy as it is a part of your savings.	Term policies do not offer loans.
A whole life policy protects you till 100.	A term policy provides cover for a shorter term, normally till age 70 or 75.
	If you are looking only for life cover, and have other alternative investment plans, then a term plan will suffice.


Both whole life and endowment plans work on similar lines - both have a savings element attached to them and, hence, are eligible for bonuses and loans.	Both whole life and endowment plans work on similar lines - both have a savings element attached to them and, hence, are eligible for bonuses and loans.
n the case of whole life polices you leave a legacy behind for your loved ones.	An endowment plan allows you to enjoy the benefits of your savings

How to best use Income Tax Sections while investing in insurance policies

Broadly speaking, there are 3 sections of the Income Tax Act 1961 that are relevant and are to be kept in mind while making investments in insurance policies

Section 80C: Under this section one can avail tax benefits to maximum amount of Rs 1 lacs. The annual premium that one pays is deducted from one's taxable income. However you have to remember two conditions that are applicable here:

The benefit for premium is restricted to 20% of actual Sum Assured
The policy has to be continued for at least 2 years or it will result in reversal of benefits taken.

Section 80D: A person can avail tax benefits under this section by buying health insurance popularly known as mediclaim policies. Under this section, the maximum deduction for individuals is Rs 15,000 and for senior citizens, it�s Rs 20,000. However the maximum tax deduction combined could be Rs 35,000 if individual buys health insurance for himself and his parents who are senior citizens.

Section 10(10D): Under this section, the Sum Assured provided to the nominee as death benefit after the insured person passes away is completely tax free. One-third portion of pension value at vesting age is exempted from tax.