Want to save tax? Go with term insurance

I've been closely observing savers and investors for almost three decades now, and even though the typical Indian saver is now much more savvy than earlier, choosing insurance still tends to be a blindspot. Most of them usually end up buying whatever insurance policy is peddled to them by an agent in their bid to save tax under section 80C before the 31st March deadline. Section 80C allows a deduction of up to Rs 1.5 lakh from our annual income for taxation purpose. In the last-minute rush, we often choose buying unsuitable insurance products. However, with a little bit of knowledge and forethought, this problem is not at all hard to fix.

Given the wide range of life insurance products available in the market, picking the right insurance policy on your own might seem complicated and overwhelming. But that need not be the case. Because the only type of life insurance policy that you really need is a term plan. What's more, it fetches you tax exemption too.

But before diving in further, remember that saving on taxes shouldn't be the prime driver for buying insurance. You must first evaluate your need for insurance. If you have dependents, you must buy it irrespective of whether you have any exemption limit under Section 80C to avail or not.

Over these years, I've come to firmly believe that as a thumb rule, the life cover provided by your term plan should be at least 10 times your annual income. For example, if you are earning Rs 10 lakh a year and have financial dependents, you should buy a term plan with a cover of Rs 1 crore. Don't shortchange your family and don't get scared by the amount of life cover. Term plans are incredibly cheap. For a 35-year-old healthy male, a Rs 1 crore life cover would cost somewhere around Rs 12,000 a year. That is only Rs 1,000 a month.

The premium that you pay for a term life insurance policy can also be claimed as a deduction under Section 80C of the income-tax act. While buying the term plan, it may also be worthwhile to sift through the available riders and consider adding one that makes sense to you. Riders not only add benefits to your basic life policy but also help you get additional tax advantage. They are additional benefits that can be added to the basic life cover at a nominal cost. The following are some riders that are generally available with term plans.

1. Accidental death benefit: Under this most common rider, if the policyholder dies in an accident during the policy term, an additional amount - which can be less than or equal to the sum assured - will be paid to the nominee.
2. Disability income: As the name suggests, this rider guarantees a monthly income for a specified time, say 10 years, from the insurance company if the policyholder becomes totally disabled due to an accident.
   
3. Waiver of premium: This rider overrides the insured's need to make the payment of premiums if he/she becomes either permanently disabled or loses income as a result of an accident or illness. The premiums are waived off completely but the life cover continues.
4. Critical illness benefit: Under this rider, the insurance company promises to pay a lump-sum amount on the diagnosis of a specified dreaded disease, such as cancer, renal failure, etc. Every insurance company has a list of illnesses that come under the rider. If you are diagnosed with one of them during the term of the policy, the insurance company will pay you an amount equivalent to the sum assured irrespective of the actual treatment cost.

The additional premium paid for all these riders can also help you save on the tax outgo. While the premium paid for any life-related rider such as an 'accidental death benefit' is eligible for deduction under the same section, Section 80C, the premium paid for any health-related rider like a 'critical illness benefit' comes under the purview of Section 80D. Section 80D provides an additional deduction of up to Rs 25,000 (Rs 50,000 if the policyholder is a senior citizen) for the premium that you pay to buy a health insurance policy. An additional deduction of the same amount is available if you buy a health insurance policy for your parents.

However, you should not buy a rider just for the sake of it or simply because it is available at extremely low cost. No matter how cheap a rider is, multiple riders will escalate the total premium, which may pinch your pocket. Always ask yourself whether you really need that extra cover. Be selective and judicious while choosing the riders. For example, if your job requires you to travel a lot, it would be wise to buy an accidental death benefit rider.

Wait! Before you hurriedly get up and make a call to your insurance agent, let me tell you that buying a term plan online is both cheaper and more convenient than buying it from an agent.