People in India have misunderstood life insurance as an investment. This is why policies like endowment plans and money back plans are widely sold. Life insurance companies also take advantage of this misconception and nurture sales fattening. Will stricter tax regulations help curb this trend?

Unlike long-term investment schemes like PPF, EPF and NPS, life insurance policies, especially those with investment, do not get full tax relief. Conditions for paying tax on income at the end of the investment term of the policies have been tightened.

194 DA in the Income Tax Act has been amended. As per the amendment introduced in the last financial year, five per cent TDS will be applicable if the net income earned at the end of the life insurance policy is taxable. Net income is calculated by deducting the premium paid up to that point from the amount received from the insurance company. The bonus will also be treated as net income.

At the same time, TDS is not applicable if the total amount received from the insurance company is less than Rs.1 lakh. TDS is not applicable if the Minimum Sum Assured is transferred to the nominee after the death of the policy holder. Therefore, TDS is not applicable for claims on term policies.

If the annual premium is more than 10% of the sum assured, income tax is applicable. For example, if the annual premium of a policy with an insurance premium of Rs.2 lakh is above Rs.20,000, income will be taxable.

In case of life insurance policies issued before April 1, 2012, tax deduction will not be available if the sum insured is less than five times the premium. That is, the policyholder is liable to pay the tax as per his tax slab, including the income received at the end of the policy term.

As per the rules enacted in 2012-13, not all life insurance policies are tax deductible under Section 80 (c) of the Income Tax Act. No tax deduction is available if the annual premium is more than 10% of the sum assured (Sum Assured). Income earned on withdrawal of investment from such policies is taxable. At the time of withdrawal, the policyholder has to pay the amount after 5% TDS directly.

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Awareness of the need for health insurance coverage has led to an increase in the number of people taking out such policies. It is also common for some people to have coverage of multiple policies. Those who have taken out policies of multiple health insurance companies and those who have group insurance coverage in addition to the policy taken individually need to understand how to make a claim.

If there is a difference in the nature of the coverage when taking out policies of multiple insurance companies, it may be beneficial to make a claim. When taking out a second policy, be sure to inform the insurance company that you have another policy.

Holders of multiple policies need only approach one of the insurance companies to make a claim. It is not mandatory to approach all policyholder companies for a claim. A few years ago, when claiming a total hospital bill, insurance companies were required to share if there was more than one policy. There is no need for it now. The policyholder can approach any insurance company for a full claim.

If the sum assured of the first policy is exceeded, a claim for the remaining amount can be made to the second insurance company. If the first insurance company does not allow a claim for the full amount and denies the claim for certain bills, the second company can be approached. The second policy can be used to make such a claim for the balance even if the sum assured in the first policy is not exceeded.

Holders of multiple policies may have doubts as to which policy to claim. It is better to use group insurance policy for those who have group insurance coverage in addition to the individual policy. This is because no benefits such as no-claim bonus are available under the Group Insurance policy. When a claim is made on a group insurance policy, the individual will also receive a no-claim bonus on the policy taken out. More extensive coverage is available on group insurance policies. The waiting period for existing illnesses is also less in a group insurance policy. At the same time, if the sum assured of the group insurance policy is not sufficient to receive the full claim amount, the individual policy will have to be utilised.

Original hospital bills and discharge summary are required to be submitted at the time of claim application. When approaching multiple insurance companies for a claim, there may be confusion as to how the bills and documents should be submitted. When approaching the second insurance company for a claim, self-attested copies of the documents and the letter of claim settlement from the first insurance company should be submitted.

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