Life insurance policies help safeguard your dependents’ financial needs and liabilities in your absence. It acts as a financial safety net for your family, ensuring that they can cater to their daily expenses and life goals without compromise. However, apart from this, life insurance policies have several advantages.
If chosen wisely, they can help you create wealth, enhancing your loved one’s security even more. You can also claim life insurance tax benefits under specific sections of the Income Tax Act.
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Top Ways to Create Wealth with Life Insurance Policies
Here are some of the ways that you can follow to create wealth with life insurance policies:
Opt for the Right Life Insurance Policy
One way to generate wealth with your life insurance policy is to choose the right one. Multiple types of life insurance policies are on the market, catering to the needs of a diverse range of people. Endowment and money-back policies are ideal for a guaranteed return investment plan.
They may not bring huge returns, but they involve minimal risks and promise guaranteed profit. You can also select the premium option flexibly—whether to pay monthly, half-yearly, quarterly, or annually.
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Go for Long-term Plans
Wealth cannot be generated sustainably in a short period. In this regard, life insurance policies are ideal long-term financial instruments. Policyholders can invest in ULIPs or other long-term plans to ensure life protection and a considerable return on investment.
In such plans, a portion of the premium paid goes towards market-linked investments, allowing policyholders to grow their wealth over time. For instance, ULIPs invest in equity or debt markets based on the policyholder’s risk appetite, potentially yielding higher returns than traditional savings accounts or fixed deposits.
This dual benefit provides life coverage and helps accumulate capital for future financial goals, such as children’s education or retirement.
Start Saving Early
As already said, it is not possible to create wealth quickly. One needs to develop a habit of saving systematically from an early age. This helps grow one’s wealth by compounding the interest rate on one’s savings.
Maintain Regularity of Payments
Another way to accelerate wealth generation through life insurance policies is to maintain regular premium payments. Any missed or delayed payment can impose a penalty, leading to the loss of insurance benefits. So, invest wisely based on affordability to ensure zero missed premium payments.
Top Ways to Save Taxes through Life Insurance Policies
Apart from generating wealth, you can also take advantage of the life insurance tax benefit by investing in these policies. Here are some of the stages when you can save tax with a life insurance policy:
Entry
While entering the life insurance policy, the insured can claim a tax deduction for the amount paid as a policy premium. For instance, if you have paid a premium of ?60,000 for your life insurance policy within a financial year, the entire amount can be claimed as a tax deduction under Section 80C of the Income Tax Act.
Whether you are self-employed or a salaried individual, this tax-saving technique applies to everyone.
Earnings
Your life insurance policy earnings are non-taxable until you withdraw them before maturity. Thus, investing in a long-term retirement or child plan policy can help grow your corpus through compounding and save you from paying taxes.
Exit
In the final stage of a life insurance policy, you receive payouts from the insurer, which are generally tax-exempt under Section 10(10D), subject to specific conditions. Further details on these tax benefits are provided in the next section.
What are the Tax Benefits of Purchasing Life Insurance Policies?
As per the Income Tax Act of 1961, policyholders can claim life insurance tax benefits under the following sections:
Section 80C
Under this section, a life insurance policyholder can claim a maximum tax deduction of ?1.50 lakh annually against the premium paid within a financial year. However, one can only claim this deduction if the premium amount is below 10% of the policy’s sum assured.
Section 10(10D)
Under this section, the death benefits provided to the beneficiaries after the policyholder’s demise are exempted from income tax. You can also claim tax benefits against surrendering value or incentives attached to the life insurance policy.
Section 80CCE
This section caps the total eligible deduction at ?1.50 lakh per year for multiple policyholders, encompassing combined deductions under Sections 80C, 80CCC, and 80CCD(1).
Thus, life insurance policies cover your family financially in your absence and help in wealth generation. Besides, you can claim life insurance tax benefits by understanding the deductions at various stages of the policy and under the specific sections of the IT Act. So, now you can better utilise your life insurance policy apart from just gaining life coverage.