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Life insurance premium refers to the monthly or annual premium paid towards any of your life insurance policies.
In India, there are different types of life insurance policies. Some of them are listed below:
Term insurance is available for a fixed term, and it is one of the most economical types of life insurance. Term insurance is just like any other life insurance; if the insurers die, their families receive a certain amount. However, term insurance is valid only for a specific term. If the term comes to an end, and the insurer is still surviving, no payment will be made to the insurer.
Example 1: Life Insurance Corporation of India (LIC) offers a term insurance plan named Anmol Jeevan II. Premium is dependent on the age of the insurer, the term of insurance and the sum assured. Insurance cover is available for any amount between ₹600,000 and ₹24,00,000. Suppose an insurer, aged 25, wants to take a term insurance of ₹900,000 for 10 years, the yearly premium will be ₹1,953. If the insurer dies during these 10 years, the family will get ₹900,000. And if the insurer is alive after 10 years, he will not get anything.
Whole Life policy is valid for the entire lifetime of the insurer. It pays a definite sum whenever the insurer dies. The policy doesn't have a maturity date, and it is not restricted to a fixed term. Insurers can withdraw the sum assured after 40 years as long as they have reached the age of 80.
Endowment Plan covers an insurer for their death for a certain period. Unlike term insurance, an endowment policy pays the policy amount after it matures, even if the insurer is alive. An endowment policy also offers a bonus upon maturity. Note that endowment policies have higher premiums than term insurance.
Example 2: LIC offers many endowment plans such as the New Jeevan Anand. Continuing with the above example, if an insurer takes an endowment policy for a sum of ₹900,000 for 10 years, the yearly premium will be ₹69,695. If the insurer dies during this period, the insurer's family will get the sum assured. Or at the time of maturity, the insurer will get the sum assured of ₹900,000 along with an additional bonus.
Money-Back policy is similar to an endowment plan. If the insurer dies, the insurer's family gets the sum assured; the insurer will get the sum assured even upon survival at the time of maturity. Unlike an endowment plan, the insurer won't have to wait for the entire term to get the assured amount. Some percentage of the sum assured becomes available at the end of 5th, 10th and 15th year of the policy. The remaining is available upon maturity.
Example 3: Suppose you take LIC's New Money-Back Plan for 20 years for an amount of ₹900,000. You will get 20% each of this amount at the end of 5th, 10th, 15th years; you will get remaining 40% at the end of the term. Plus, you will get a bonus at the end of the term.
Life insurance premium qualifies for a tax benefit with a deduction of up to ₹150,000 per year from taxable income. For example, your income is ₹600,000 and you pay life insurance premium of ₹50,000, your income tax will be calculated only on ₹550,000. Tax benefits of life insurance premium are available to both individuals and HUFs. Individuals can take the policy in their own name or even in the names of their spouse or children.
Use our Indian Tax Calculator to see how much life insurance premium reduces your tax.