Should You Keep or Drop Your Life Insurance Policy Under the New Tax Regime?
The introduction of the new income tax regime has left many taxpayers reconsidering their life insurance policies, particularly those purchased primarily for tax benefits. With the new regime eliminating tax deductions for life insurance premiums, policyholders are now evaluating whether to continue or terminate their coverage.
Assessing Your Policy’s Value
Life insurance remains a crucial component of a comprehensive financial plan, offering protection and safeguarding financial goals. However, traditional policies often provide limited coverage, typically around 10 times the annual premium. Many were purchased solely for tax savings rather than genuine financial protection.
Under the new tax regime, these policies lose their appeal since the tax benefits are no longer available. Nevertheless, premature closure can have significant financial implications. For policies less than three years old, terminating them results in the forfeiture of all premiums paid. Financial advisors suggest that absorbing this loss might be preferable to continuing a policy that will yield minimal returns over the next decade or more.
Understanding the Financial Implications
For newer policies (less than three years old), terminating them means losing the premiums paid. While this may seem unfavorable, experts argue that it’s better to absorb this loss and invest future premiums in more lucrative opportunities.
For older policies, surrendering them after three years yields a surrender value, though it’s typically not high. For instance, a policy with an annual premium of Rs 20,000 surrendered after three years might return around Rs 18,000, or 30% of the total premiums paid.
Different rules apply to Unit Linked Insurance Plans (ULIPs). These have a mandatory five-year lock-in period, but terminating them doesn’t result in the forfeiture of premiums paid. Instead, the accumulated amount is transferred to a discontinuance fund, earning a minimal 4% interest, and returned after the lock-in period.
Expert Advice for Policyholders
Financial experts recommend continuing premium payments if the policy is set to mature within 3-4 years to reap the full benefits. For those struggling to pay premiums, converting the policy into a paid-up plan is advisable. This option stops premium payments but keeps the policy active, albeit with proportionally reduced benefits.
Key Considerations
- Policy Maturity: If your policy matures soon, it might be beneficial to continue paying premiums.
- Financial Implications: Understand the surrender value and potential tax liabilities.
- Alternative Investments: Consider investing in more lucrative avenues.
By carefully evaluating these factors, policyholders can make informed decisions about their life insurance coverage under the new tax regime.
