Waiting Period in Term Life Insurance

Written by : Knowledge Centre Team

2024-08-02

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Waiting Period in Term Life Insurance

Generally, there is no waiting period in a term insurance plan other than suicide. In case you have opted for additional riders such as covers for critical illnesses, there could be specific waiting periods for these.

Suicide is a ‘moral hazard’ in the insurance lingo. This means, that a person with good financial history, but a depressed state of mind can use life insurance as an exit strategy. For example, buying a large life cover and then killing self so that family can live debt-free, etc.

However, clinical psychology has suggested that a 12 month gestation period should be enough to allow a suicidal person to change their mind and bring them back to life. That means, if you buy a larger term insurance cover with a plan to commit suicide and let your family have enough money for survival, and wait for 12 months, you are unlikely to act on your plan.

Waiting Period Clause in Term Insurance

The waiting period is a common clause used in all types of health insurance covers including critical health insurance. The waiting period clause defines the maximum time limit after which the insurer will start accepting claims under the policy. However, term insurance plans do not have a waiting period clause for covering untimely demise.

Only Saral Jeevan Bima, which is a standardized term insurance policy defined by the insurance regulatory authority in India IRDAI, carries a waiting period clause. Under this plan, a waiting period of 45 days is applicable for the full sum assured payment upon death. The waiting period applies to the first policy year from the risk commencement date.

If the insured dies within the waiting period Saral Jeevan Bima returns 100% of the paid premiums to the nominee. Only accidental death is covered within the waiting period. The taxes paid on premium amounts are not refundable.

Suicide Clause in Term Insurance

As per IRDA, in the case of term insurance policies that were issued before 1st January 2014, the sum assured is not payable in cases of suicide. However, a specific percentage of the paid-up premiums may be returned to the nominee. IRDA has amended the suicide clause for policies issued post 1st January 2014 and allowed insurers to pay the sum assured, albeit, with specific guidelines.

If the insured commits suicide within 12 months of the policy starts date or revival, then the sum assured will not be paid to the nominee. However, suicide is covered post-12-months from the policy start date or revival date. Suicide is an outcome of a mindset that is situational.

The 12-month clause is made so that people do not take undue advantage of insurance policies that will cost them their lives. But such a mindset may not exist after 12-months. Experts suggest that the duration of 12 months is sufficient to bring the insured person out of the mindset of suicide.

FAQ

Income tax in India is based on incremental slab rates. The rate of tax is higher on higher income. You can also avail deductions from your taxable income if you invest in eligible instruments like PPF, NPS, ELSS, ULIPs, etc. Starting AY 2020-21 you have two tax regimes – old and new. The old tax regime has all the deductions from gross total income, while the new tax regime offers a lower rate of tax. So, if you are not investing in tax-saving instruments you can file your tax as per the new tax regime.

You can avail additional tax savings under the following sections other than section 80C:

a) Section 80D: Health insurance premium payments for family and parents up to Rs 75,000
b) Section 80CCD(1B): Self-contribution to NPS Tier-I account above 10% of salary or 20% of income if self-employed up to Rs 50,000
c) Section 80E: Education loan interest paid through the year
d) Section 80EE: Home loan interest paid up to Rs 50,000
e) Section 80G: Charitable contributions to non-profit organisations registered under section 12A up to 50% or 100% of the contribution
f) Section 24B: Interest paid on home loan

You have many tax-saving investment options. You can consider the following popular tax-saving schemes to save tax:

a) Term life insurance plan
b) Health and critical illness insurance plan
c) Life insurance plans such as endowment and moneyback plans
d) Pension plans from life insurance companies
e) Public Provident Fund (PPF)
f) National Pension System Tier-I account (NPS)
g) Employee Provident Fund (EPF)
h) Unit Linked Insurance Plans (ULIPs)
i) Equity Linked Savings Scheme (ELSS)
j) Senior Citizen Savings Scheme
k) Sukanya Samriddhi Yojana
l) 5-Year Tax Saving Fixed Deposits
m) National Savings Certificate (NSC)

Deduction of Rs 1.5 or 2 Lakhs under section 80C is available when you make investments or spend money under the heads mentioned in the Chapter VI A of the Income Tax Act, 1961. All tax-saving investments like PPF, NPS, ULIP, ELSS, etc. and all tax-saving expenses like children’s tuition fees, and registration expenses of a house property are part of Chapter VI A.

You will need to pay taxes on the incomes and gains from your investments. For example, your salary income is Rs 10 lakhs in a year, out of which Rs 7.5 lakhs becomes taxable after deducting exempt perquisites. Out of your income of Rs 10 lakhs, you invest Rs 3 lakhs in various options.

Even if none of your investments is eligible for tax saving under section 80C, your taxable income will remain Rs 7.5 lakhs. However, returns from some of these investments will become taxable in the next financial year when you receive them.

Since AY 2020-21 you have two ways to lower your income tax outflow on higher income – tax-saving investments and a new tax regime. You can stick to the old tax regime and invest your savings into eligible tax saving options. Tax-saving investments can give you a deduction of up to Rs 2 lakhs under sections 80C and 80CCD(1B), and additional deductions of up to Rs 2 lakhs under section 24.

Your deductions will be higher with other sections like 80E and 80G. But these are specific outflows which are not investments.

The best way to reduce your tax outflow legally is to use tax-saving investments and plan your future taxes carefully. Tax-saving investments will help you reduce your taxable income in the present financial year. If you invest in options which enjoy tax exemptions on maturity values, you can also reduce your future tax outflow. For example, Invest 4G ULIP from Canara HSBC Life Insurance allows you to stay invested up to the age of 99. This means that you can start investing at 30, build a corpus by 60 and have a tax-free lifetime pension.

Usually, a receipt is a convenient document to produce while claiming your deductions for expenses. However, the following alternatives are available if you lose the receipt:

a) Avail fuel or petrol expenses with number of kilometres
b) Credit card statement for computer items
c) Credit/debit card statement for stationery items
d) Membership documents to show running membership to claim the fees amount

You can claim HRA exemption with your employer and declare the amount in your ITR-1 form while filing your tax return. You will need to submit your house rent receipts with your employer to reduce your TDS. Use the online calculator to estimate your HRA exemption and claim the amount directly in your ITR.

If you are self-employed or do not receive HRA from your employer but have been paying rent for residence, you can claim a deduction of up to Rs 60,000 under section 80GG.

You can calculate your HRA exemption based on the following conditions. The amount of exempt HRA will be the lowest of the three:

a) HRA you have received
b) 50% of salary (basic + DA + Commission paid as % of turnover) if you are staying in a metro city otherwise 40%
c) Rent paid over 10% of your salary (as defined in step 2)

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