Mistakes You Should Avoid Before Buying A Term Insurance

The changes in the Union Budget are eagerly awaited by businesses and working professionals alike. However, as the year gone by witnessed the outbreak of an unprecedented crisis in the form of a pandemic, there was greater excitement to observe what the financial bill proposed.

One of the most significant announcements made in the 2021 Budget for life insurance companies is the rollback of tax exemption on maturity proceeds available to ULIP plan (Unit Linked Insurance Plans) under Section 10(10D) of the Income-tax Act, 1961. This change is touted to impact the business of life insurance policies in India.

Let us explore in detail what other changes did the Budget 2021 proposed for the life insurance sector.

Liberalisation in Foreign Direct Investment (FDI)

The Union Finance Minister Nirmala Sitharaman, in the Budget for 2021-22, proposed a revision in the FDI limits. As against the former 49% of FDI, the Government has now changed the limit to 74% permitting a greater influx of international funds in the insurance sector. The expectation from this renewal is to not only provide access to fresh capital for the insurance companies who had been struggling to raise capital from existing promoters but also benefit individual policyholders with more value-based and affordable healthcare, enabling them to reap greater insurance benefits. This might include the adoption of a digital-first approach wherein online life insurance policy purchase is encouraged. This latest move will also make the insurance sector more competitive, transparent, and efficient to help individuals buy good life insurance online for themselves. It is for the first time that foreign insurers will be able to take a majority stake in an Indian insurance operation. Formerly, the 49% limit on FDI and the lack of management control have hampered multinational insurers who can now reassess their strategy for India.   

There are certain conditions associated with the provisions:

• The majority of the Board of Directors and key managerial employees need to be resident Indians
• At least 50% of the directors need to be independent and
• There is a requirement for a specified percentage of profits to be retained within the company’s general reserve

For insurance companies, these amendments are likely to increase the solvency position and provide long-term growth capital for companies to invest in newer technologies. This could include enhancing the experience for the purchase of online life insurance policies.

The industry leaders are looking forward to a quick and efficient implementation of this proposal to accommodate and streamline the changes.

Disinvestment and IPO Launch

In her Budget speech for 2021-22, the Finance Minister announced that that two public sector banks and one general insurance firm will be disinvested this year. Repeating its intention to list the state-owned life insurer, Nirmala Sitharaman stated that the Initial Public Offering (IPO) of LIC will be completed in 2021-22. Several legislative changes have been proposed in the Finance Bill to enable this and amend the Act governing the LIC to bring its mode of operations closer to that of a private insurance company. The amendments require the initiation of a process of appointing consultants to work on various stages of the preparatory work towards the proposed listing.

Taxation on ULIPs

One of the most significant announcements made in the 2021 Budget for life insurance companies is the rollback of tax exemption on maturity proceeds available to ULIPs (Unit Linked Insurance Plans) under Section 10(10D) of the Income-tax Act, 1961. ULIP plans bought on or after 1st February 2021, where the unit term insurance premium paid is more than ₹2,50,000, would attract capital gains tax. 

Under the proposed amendments, ULIPs will be considered a ‘capital asset’ with the gains or losses chargeable to income-tax as Long Term Capital Gains (LTCG) in the year of receipt. Additionally, to discourage purchasing multiple ULIPs with premiums below ₹2,50,000, the said budget proposes an exemption restricted to aggregate policies whose combined premium is up to ₹2,50,000.

This unpleasant change is touted to impact the business of life insurance companies considering that ULIPs will not be a popular choice going forward. Section 80C of the Income Tax Act enlists numerous tax-saving instruments, including life insurance plans, amongst others. However, under the proposed amendments, ULIPs will be considered a ‘capital asset’ with the gains or losses chargeable to income-tax under the head ‘capital gains’ in the year of receipt.

So, does this mean ULIPs are not a viable investment-insurance instrument?

Of course not!

ULIPs are still an effective insurance plan that offers life cover, wealth generation and tax benefits, all under a single plan.

• The life insurance details of the plan assure a secured financial future for your family.
• The investment component offers long-term wealth generation capabilities for you
• The premium paid and the life cover payout are still tax-deductible and tax-exempt, respectively, under the Income Tax Act.
• Additionally, the Capital Gains tax on the maturity payouts also has multiple conditions:
• The total annual premiums should exceed ₹2.5 lakhs. This means, if your total premium is below ₹2.5 lakhs, then you still continue to enjoy tax-free maturity benefits.
• The new taxation rules are applicable for policies purchased after 1st February 2021. That means, if you have an existing ULIP purchased prior to February this year, you will still continue receiving the tax benefits on the maturity payouts.

In the wake of the pandemic, it has become even more important to buy life insurance online. ULIP investments offer a great avenue to combine multiple goals in a single plan – wealth generation, tax benefits and life cover.

The ULIP plan of Edelweiss Tokio Life Insurance – Wealth Secure Plus offers:

• Whole life cover up to 100 years of age
• Regular boosts like loyalty additions, maturity additions, booster additions, etc. to add to your wealth generation
• Tax Benefits as per prevailing tax norms

To know more about Edelweiss Tokio Life Insurance Wealth Secure Plus ULIP insurance, get in touch with us today!

 

Neha Panchal - Financial Content Writer

Neha used to be an Engineer by Profession and Writer by passion, which is until she started pursuing full-time writing. She's presently working as a Financial Content Writer, with a keen interest in all things related to the Insurance Sector.