Is Maturity Benefit in Life Insurance Tax-Free?

Life insurance policies are referred to as one of the significant ways to make sure that your life is insured in any undesired circumstances such as health disability, unemployment, accidents, or even death. And with the inclusion of new amendments in the provision of the Income Tax Act, you can not only secure the financial requisites of your family but also you can get benefitted from tax exemptions on life insurance policies.

Life policy is just trying to protect you from uncertainties, and this is why people always looking for life policy. Life policy has a number of benefits, and every benefit describes the uncertainties that you might look at.

Know about the Maturity Benefits of Your Term Insurance

It is a common notion among us that the benefit amount received during the maturity of all life insurance policies is tax-free always. But the catch is not all the life insurance policies are subjected to tax exemption on maturity however exceptions are still there. In order to avail of the tax benefits on a life insurance policy, the policyholder must match up to the below-mentioned criteria.

Anyone of us ever thought about, why insurance company always looking for young people to insured them, and what is the profit behind the proposal of it. Well, no one thinks about it so much, and it won’t bother anyone but you should know why people suggesting to buy the policy at a young age. Being a young guy, you have your own profits and maybe these profits lead insurance companies towards the young guy. And, one thing that affects our mentality is, if want to get the maturity benefit then you should opt for the policy as younger as you can. 

What is Maturity Benefit?

Maturity benefits simply refer to the amount received by the policyholder once a policy matures. A defined sum is settled with the policyholder by the insurance companies which is liable to be withdrawn when the policy matures.

However, to avail of the distinctive maturity benefits, one needs to match up with the basic continuation of a policy and its completion to the exact term mentioned under the contract. In most of the cases, the amount to be received at maturity is the multiple of premium paid during the time policy was active plus some added benefits if given by the insurance company to the client.

The basic eligibility of a policy subject to maturity benefits is that it should remain active throughout the term. Some key maturity benefits received from life insurance policies are mentioned here:

• Basic sum (as mentioned during the policy activation)
• Accrued additions (if any)
• Reversionary dividend (if any)
• Terminal bonus (if applicable)

Tax Considerations When You Get Life Insurance

To escalate the involvement and usage of life insurance policies among citizens, major government bodies are emphasizing introducing forms like Section 10(10D) and 80C under Income Tax Act. Section 10(10D) offers options to the clients so they can easily claim the tax exemption on the amount which is to be received for life insurance. There are a few conditions that have been levied on this tax exemption, notified below.

• Any life insurance policy which is issued after 1st April 2003 up to 31st March 2012 and the yearly payable premium is more than 20% of the “Actual Sum Assured”, then the received sum will come under the ambit of that year in which the policyholder is ought to receive the payout. Here “Actual Sum Assured” refers to the minimum amount which is guaranteed to be given to the policyholder in all policy years (excluding bonuses and premiums that can be claimed).

• Policies issued after 1st April 2012 are subjected to the above condition but with different requisites. First, the payable premium gets to 10% of the actual sum assured. Secondly, the policyholder if is entirely or severely disabled and suffering from chronic dieseases is subjected to the limit of 15%.

• If the insurance policyholder has died and the legal nominees are seeking the maturity benefits, then the above clauses are not applicable in that case. Instead of nominees, the whole sum is exempted from tax.

• Proceeds are taxable for policyholders who were part of the Keyman insurance policy. The keyman insurance policy refers to the one where the policy is taken by an individual on behalf of someone else’s life.

If in case the policy proceeds are not liable for tax exemption under Section 10(10D) and the PAN details of an individual are registered with the insurer, then s/he will have to pay TDS at the rate of 2% of the sum to be received by them.

However, the tax is only payable if the received amount exceeds Rs. 1 lakh. In case the PAN details are not registered, then 20% of the amount is taken as the tax.

Maturity Benefit When Premium is Skipped

One of the common and majorly asked questions while getting life insurance is that if in case the premium is skipped for once and is then combined to be paid next year making the insurance premium paid to be 20% of the assured sum limit. Will the maturity benefit still remain tax-free or would the maturity benefit on life insurance be taxable?

According to Section 10(10D), the maturity benefits remain non-taxable as long as the payable premium is less than 20% of the assured sum during any financial year. This means it is the payable premium that matters instead of paid premium and thus paying two premiums together in a year doesn’t add up to an increase in premium to be paid. For example, if the sum assured is Rs 100000 and the premium to be paid is below Rs 20,000, then maturity benefit on a life insurance policy is exempted from tax.

Read our article “Why Is Life Insurance Necessary for Life?” for understanding more about Life Insurance.

Finally, the new guidelines of ULIP state that no policy can be withdrawn or surrendered completely before 5years. Also, the norms relating to tax-free maturity benefits have now been changed for good. So, relax and purchase a life insurance plan of your choice.