Come January, February, March, people start discussing about tax and wealth management. Wealth managers and tax planners start doling out advice about how to save tax and manage your wealth. Unfortunately, in India tax planning is left to these few months and is often a last minute thing. Most people who start tax planning consider life insurance, PPF and home loans as the best way to save tax. Very few people look at general insurance as an effective tool for tax planning and wealth management.
However, unlike common misconception, certain general insurance policies can also help in saving tax as well as in wealth management. In this article, we list the factors that can help in saving tax with general insurance policies.
Tax Planning with Health Insurance
The first policy that you need to check when planning your tax is health insurance. Health insurance policies are designed to secure your family in case of a medical emergency. What people probably do not know is that the Income Tax Act 1961 has regarded health insurance as an important investment as well. Hence, while protecting yourself and your family from medical exigency, you can enjoy tax deductions under Section 80D of the Act. The deductions under this section are offered towards the health insurance policies on self, spouse and children and parents.
In case the insured is below 65 years of age, then the exemption for the policy taken for self, spouse and children is Rs.15000. If he or she has dependent parents, above 65 years of age, the exemption is increased to an additional Rs.20000, making the total deduction under Sec 80D as Rs.35000.
However, instead of looking at health insurance just as a tax saving tool, people have to see it as the need of the hour. It should be viewed as a protection tool instead of saving tax only. Along with this, health insurance should be a part of wealth management. One of the key reason for this is because of the sharp increase in the cost of health care. While previously the cost of surgeries, such as angioplasty, heart bypass surgery, heart-lung transplant, was around 2 to 3 lakh, today it has increased to more than 7 to 8 lakh.
The best part is that the premiums of health insurance policies is not much as compared to the protection it provides. The premium for a 5 lakh Family Floater Policy for a 40 year old man, covering a family of four, would be approximately Rs.12312 per annum. This is merely Rs.35 per day. This once in a year payment can save you from unexpected financial burden due to major illnesses or surgery so that your financial planning does not go for a toss.
Other health insurance policies that can help an individual in tax planning include:
• Critical Illness Policy: A benefit policy where the insured is paid a lumpsum amount when diagnosed with disease such as kidney failure or stroke. The insured is covered against 11 critical health conditions and can choose from SI from Rs.1,00,000 to Rs.50,00,000. This is covered under Section 80D of the Income Tax Act 1961.
• Surgical Protection Plan: The costs for surgeries has risen manifold. Surgical Protection Plan, a benefit policy, provides a fixed benefit amount for specified surgeries and helps the insured take care of the expensive medical treatment in a hospital. This plan, which allows you to save tax under Sec 80D, provides comprehensive coverage for 600 surgeries and a person can choose from 11 Plans with Rs.1 Lakh to Rs.10 Lakh sum insured options.
• Hospital Cash Daily Allowance: Hospital Cash Policy provides daily cash allowance for all sundry expenses during hospitalization. The lumpsum amount paid ranges from Rs.500 to Rs.2500. Moreover, it also helps in saving tax under Section 80D of the Income Tax Act 1961.
Loan Protection with Personal Accident and Critical Illness
For Wealth Management, people should look at accident health insurance policies, such as the Personal Accident Policy and Personal Guard, which covers against accidental death and permanent total or partial disablement for keeping their wealth secure. These plans provides loan protection where the insured is paid 3 months installment of the loan in case of temporary disablement and if the person should be laid off from work. The policy also provides total payoff of the loan in case of death or total disablement. One can add critical illness policy also to protect his loan amount. These two covers put together gives comprehensive security with minimum cost. Few banks provide this product bundled with their loan amount.
While discussing wealth management, people should put this product on a priority as it saves from financial burden in case of any eventuality.
Home Insurance as a Wealth Management Tool
Whenever I discuss insurance with my friends staying abroad, they tell me that even when they buy an expensive pan, they get it insured. Sometimes, I get calls from friends who have bought expensive mobile phones, wanting to know how they can insure it. I tell them then that they should buy home insurance that can cover their assets on an all-risk basis. Covering all the assets is not important. How well you plan things while doing your wealth planning is important.
Another benefit of home insurance is that it is available on agreed value cost. The construction cost of a 1000 sq. ft. flat in Mumbai is only Rs.25 lakh but the purchasing cost of such a flat will be more than Rs.1.5 crore in any average locality in a major city such as Delhi or Mumbai. If the society or other owners don’t choose to rebuild the building, the insured gets only Rs.25 lakh in case of a calamity. To cover this risk Bajaj Allianz has come up with the Agreed Value clause, where one can buy insurance at Rs.1.5 crore and at the time of total calamity, get the full value.
Moreover, the premium rates for home insurance are quite reasonable with premium of home insurance for structure and contents of around 50 to 60 lakh is approximately Rs.5000 per annum. All-risk policy for contents is also available in about Rs.3500 for a Sum Insured of Rs.5,00,000.
As human beings, we have this tendency of wanting to secure expensive products that we have bought. Our home, being one of the most expensive products, should be secured as well. If you have put all your savings into buying the house and have committed to paying instalments for it for the next 15 to 20 years, then you should ensure that you get it insured. The next time you start wealth and tax planning with your consultant, then ensure that you keep these things in mind and add these insurance covers to your financial planning.
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This article was authored as an expert opinion piece by Mr. Aditya Sharma – National Head of Websales, Direct Marketing, Travel Insurance, Home Insurance and Retail Health at Bajaj Allianz General Insurance Co. Ltd.
You can follow him on Twitter @adityarpsharma