While term insurance plans are necessities for safeguarding your family's financial future, they are sometimes perceived differently. Some people purchase these plans to get last-minute tax benefits. While the practice is more common than you might think, you should never follow the herd in this case. Term plans do come with tax benefits, but there's more to purchasing them than only the tax deductions. Here's a look at the tax deductions they offer and some essential things you should consider when buying a term insurance plan. 

What are the tax benefits of term plans? 

Term insurance plans offer various tax benefits for policyholders under different sections of the Income Tax Act of 1961. These include the following: 

• Section 80C Deductions - The premiums paid by the life insured are deductible up to Rs. 1.5 lakh as per the provisions of Section 80C of the Income Tax Act, 1961 

• Section 10D Deductions - The death benefit paid out to the policyholder's nominee by the insurance company (in case of their unfortunate demise within the policy term) is exempted from taxation under this section 

• Section 80D Deductions - Deductions up to Rs. 25,000 are applicable under this section if a critical illness rider is included in the term plan and premiums are paid accordingly 

Why Is It Not Prudent To Buy A Term Plan For Tax Benefits?

As mentioned, some people purchase term policies to save taxes without paying heed to their actual life insurance needs. This may result in a disproportionate amount being allocated towards your term plans, creating a disbalance in your portfolio. In such a scenario, an individual can either be over-insured or under-insured. 

Over-insured portfolios have excessive term insurance coverage, meaning that you have allocated much of your money into something you may not require. As a result, you may also be paying higher premiums and denting your savings. So a miscalculated endeavor to save taxes can result in a loss of opportunity to invest your money and create wealth.

At the same time, an excessively low coverage amount, despite an affordable and tax-exempt premium, should also be avoided. It can leave your family with inadequate financial security that can result in financial strain in case of your untimely demise. 

Therefore, you must choose the sum assured for a term plan prudently. Tax benefits are something that should be a secondary benefit. The primary benefit of a term plan is the financial security that it lends to your family. 

It will help if you use a term insurance calculator to know the right amount you need regarding your coverage. The usual thumb rule is at least 10-20 times your annual earnings. Although, this depends on parameters like your monthly expenses, savings, and inflation rate. If you have more dependents, you'll need more life coverage. If you have debts like home loans and other liabilities, you should also get coverage for them. 

What are the other things to keep in mind?

Some other things that you should note include the following: 

• Tenure - Most people do not accurately work out their ideal policy tenures. Some end up purchasing policies that are too long-term for comfort, while others end up with shorter terms that are risky for their families. Longer tenures equate to higher premiums, while shorter tenures leave people vulnerable. The best way is to plan for coverage at least till you retire. Usually, retirement is one life stage when you have already taken care of most financial commitments and built savings for your future years. 

• Upgrades - The earnings of individuals determine their lifestyles. Term plan coverage is expected to make up for the same in case of the primary breadwinner's demise. If your income has increased swiftly throughout the years, with an equal elevation in your lifestyle, you will have to upgrade your insurance coverage periodically. This ensures that your family can maintain their living standards in case of your unfortunate demise. Upgrades are also required whenever you add new family members to your policy. Crucial milestones like having a child or marriage also necessitate upgrades. Depending on the terms of your policy, you may be able to increase your sum assured, or else you can get a new policy to increase your overall life cover.

• Added Safety - Many unforeseen events may happen in life, including accidents that lead to disabilities and loss of income. Pure life coverage will not help you in this regard. You should always have added safety against things like accidental death/disability, critical illnesses, and so on. This necessitates purchasing suitable riders for your term plan. 

• The Insurance Provider - Choosing the right insurance provider is a must, particularly when you have so many available options. Go by an insurer's track record, checking parameters like its claim settlement ratio, solvency ratio, and overall reputation in terms of customer service. The company should also have an accessible digital interface for more information, services, and comparisons. 

Hence, as you can see, it is not enough to go for a term insurance plan just to save on taxes. So, prior to signing on the dotted line, you must keep all the pointers mentioned above in mind to ensure proper protection for your loved ones. This will help you choose the best possible plan for your needs.