The uncertainty of the economy in today’s trying times can be a challenge. You need to prepare backup plans that will assist in your survival while you actively pursue your paycheck. While investments are a great way of growing your wealth, you also need safer approaches to utilise the power of compounding to your advantage.
Savings plans can offer excellent means of growing your wealth and creating a backup plan with the power of compounding. Let us take a closer look to identify how savings in life insurance help reduce tax liability, grow your money, and contribute meaningfully to your financial goals.
What are savings plans in insurance?
Life insurance is the surest way of protecting the financial security of your loved ones. Luckily, in light of the growing needs of humankind, insurers have also developed suitable savings plans with an insurance component to help you through tough financial times.
Savings plans are a variant of life insurance policies that allow you to avail yourself of the benefits of life insurance and build a corpus simultaneously. Predominantly, Endowment plans and Money-back plans are the most popular forms of savings plans available these days. They offer bonuses and money back on your premium that you can withdraw at regular intervals to tackle financial crises.
How savings in life insurance help reduce tax liability?
There are several ways in how savings in life insurance help reduce tax liability. Essentially, savings plans are life insurance policies and premiums paid towards life insurance are eligible for deductions. Let’s get a clearer view of how savings in life insurance help reduce tax liability:
- If your annual premium is less than 10% of the total sum assured or less than INR 1.5 lakhs, then you are eligible for tax exemption. If you or the policyholder have a severe disability, the deduction is up to 15%. If your policy was purchased before April 2012, the deduction is up to 20% under Section 80c of the Income Tax Act.
- If you or the policyholder has riders on the insurance savings plans, such as critical illness cover or accidental death benefit, you are eligible for tax benefits on the premium, particularly paid towards them. The bar is set at INR 25,000 for those below the age of 60 and INR 50,000 for those above the age of 60.
- The death benefit that your beneficiaries receive in the event of your demise is also tax-exempt. If you survive the policy tenure and receive the maturity benefit, that is tax-exempt, too.
The amount of your income that you invest in life insurance plans is eligible for deductions on multiple fronts. Since savings plans also allow you to grow your health, mostly by investing your money in government bonds and certificates, the tax benefits stand to reason.
So now that you understand how savings in life insurance help reduce tax liability, let’s discuss how they compound for better chances at building a corpus.
Using savings plans and the power of compounding to your advantage
Savings plans help you build a fund to fall back on in times of crisis.
You can purchase endowment insurance plans as a participating member and earn sufficient bonuses. Money-back plans, on the other hand, let you withdraw part of your premium investments at regular intervals and still pay the death benefit to your beneficiaries after your demise.
There are other savings plans, including provident funds, national certificates, and other such instruments, that also allow you to invest your money and earn smaller returns. These savings plans are designed to earn interest annually. When you invest in them and let them grow, your corpus keeps increasing. Thus, every year, when the percentage of interest is calculated, the principal amount increases.
Your interest rate may not increase on savings plans, but when the principal amount compounds, so does the resulting return. For instance, if you invest INR 10,000 at a 6% rate of annual return, then at the end of the first year, your total amount becomes INR 10,600. In the following year, when you invest an additional INR 10,000, and a 6% rate of return is applicable, your total amount becomes INR 21,836. Therefore, instead of only earning INR 600 returns, you make an additional INR 1200 due to the increase in the principal amount.
Compounding interest plays a major role in growing your wealth with savings plans. Although the rate of return may seem small, when unhindered, savings plans also grow exponentially to help your financial situation. Not withdrawing the fund or becoming a participating member in endowment or money-back plans allows you to build a steady corpus through the years and add additional benefits for your loved ones in the case of your death.
