Single Premium Insurance Policies And Taxes: What You Need To Know

Yes, many of us know of or have at least heard about life insurance tax benefits. But what about single-premium insurance policies? These are specific kinds of policies that ensure life coverage for a particular duration. What about their tax benefits? Let us look closely at single premium life insurance policies along with their salient features, in tandem with their tax benefits. 

Single premium life insurance policies- What do they mean?

Single-premium life insurance plans are those where policyholders can pay the whole premium for the policy at the outset. Life insurance plans usually come with several premium payment options, including payments at regular intervals, i.e. monthly, quarterly, or yearly and even limited pay (where you pay the amount for a particular duration such as 5, 7, or 10 years). These policies offer the same life cover as other regular plans, with the hassles of premium payments eliminated from the outset. 

Here are some other aspects of single-premium life insurance policies: 

• Single premium term policies offer pure coverage where the insurance company pays a sum assured to the nominee of the policyholder in case of their unfortunate demise within the policy period
• There is limited documentation required for buying a single premium life insurance policy
• The documents required include PAN/Aadhar/Voter ID Card as the identity proof and age proof (marriage or birth certificate along with other official documents). You should also provide medical history proof (medical records and documents) along with address proof (electricity/water/utility bills along with other Government documents) and income proof (last three months’ salary slips or bank statements. You can also share income tax returns for the last two years).
• You should be an Indian resident while updating the insurance company about your present health condition and medical history over the years

Let us now examine the tax benefits offered by single-premium life insurance policies. 

Tax Benefits Offered By Single Premium Life Insurance Policies

Here are the key points regarding the tax benefits of single-premium life insurance policies:

• Single-premium life insurance policies are eligible for the deduction on the premium paid under Section 80C. You can get a deduction from your gross income up to Rs. 1.5 lakh under this section on your one-time payment instead of getting it year after year. Hence, with a single premium plan, you may possibly be able to maximize your tax deductions under this section for a particular financial year without having to invest in other eligible instruments.
• Section 10 (10D) also exempts the sum assured amount from taxation in the hands of your nominees in case of the payout under a death claim. This is the usual tax benefit in the case of a term insurance policy. For other life insurance policies with maturity payouts, there are certain terms and conditions worth noting. For life insurance plans issued after the 1st of April, 2012, the exemption will apply when the premium is lower than 10% of the sum assured amount. It is also applicable for a single premium term insurance policy. For one-time premium plans, the maturity proceeds will be tax-free if the sum assured is 10 times the amount paid in a single premium.
• The minimum sum insured will be 1.25 times the single premium amount, with the maximum being around ten times for these plans.

If you surrender a single premium term insurance plan, then you may get a surrender value that is tax-free only if you have owned the same for a minimum of two years. In addition, the date of issue affects the taxability of the surrender value. You should know about these complexities if you ever think of surrendering or terminating any single premium term insurance policy. If you surrender before two years of holding the policy, then the tax deduction that you received earlier will be taken as your income. You will then have to pay the taxes that are due on the same. 

These are the major aspects pertaining to the tax benefits offered by single-premium life insurance policies. If you are buying any such policy, then you should naturally work out the premium payment beforehand with an online calculator for the amount that you desire as your sum assured. Make sure that you can afford the single premium payment, which is likely to be high since you will pay the premiums for the entire policy tenure. You should only opt for the same if you wish to invest a lump sum for instant tax benefits while getting future financial security for your family in any untoward situation. Then, you will not have to pay premiums any longer and can rest assured, knowing that you have sizeable life cover for a long tenure. 

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