The insurance business in India isn’t just growing, but also becoming more sophisticated in terms of product offerings. To help readers keep ahead of developments in this business, Mint features a Q&A on insurance every Monday.
I am a 30-year-old executive working for an MNC in Delhi. My annual income is Rs12 lakh. Recently, I was approached by a financial planning adviser for a pension plan. Do you think I need to invest in a pension plan?
Put simply, everyone needs to provide for their retirement years. Most of us are less economically active during our retirement years and, although, typically, our financial needs reduce during retirement, these needs are still considerable and with continued improvement in medical facilities, people tend to live longer. In addition, longevity has increased considerably with continued improvement in medical facilities. For all of these reasons, we need to secure a regular income that will be adequate enough to maintain at least our present standard of living.
Our retirement has to be funded during our most economically active years and a good pension plan is the best way to do this. For pensions, the golden rule is that the earlier you start, the better.
Pension plans help one to ensure regular income after his/her active earning period. Ideally, pension plans should be purchased by self-employed, businessmen and all individuals not covered by the government pension scheme. Even for those who are in employment in private or public sector organizations, the final pension may not be sufficient to continue with the same standard of living post retirement. Individual pension plans help to supplement their retirement income.
Are there any insurance plans for specific purposes or needs?
Yes, one can buy an insurance plan for a particular need in life. For example, pension plans help one to save and get regular income at the time of retirement, child plans help one to save and get benefits to meet the child’s higher education, marriage or business needs, term assurance plans help one to protect the family against the loss of income upon the policyholder’s death, endowment/whole-life plans help one to get both protection and savings benefits, and unit-linked plans help one to save and get benefits which are market related. Depending upon individual need and risk appetite, one can choose an insurance plan to meet the need.
Investment in life insurance policies also helps one to avail income tax benefit to the extent of premiums paid in each financial year. Further, the maturity and death benefits from these policies are tax exempted as per the prevailing income tax rules.
Are the proceeds of partial or full surrender (before maturity) of a unit-based insurance policy taxable?
Under section 10(10d) of the Income-tax Act, 1961, any amount received under a life insurance policy, including the sum allocated by way of bonus, is exempt from tax. Therefore, partial surrender can be treated as tax exempt.
However, if a person discontinues a policy before five years, no deduction will be allowed in respect with any premium paid on that policy in the year in which the policy is terminated.
Further, the amount of tax rebate allowed on that policy in the previous year(s) shall be deemed to be tax payable in the year in which the policy is terminated.
Readers are welcome to write in with their queries to email@example.com. The questions will be answered by senior executives from leading insurance firms.
This week’s expert is Bert Paterson, managing director and CEO, Aviva India.