Can I save money with insurance?

4.5

Note and Coin each adding coins to their piggy bank Note and Coin each adding coins to their piggy bank

Insurance is often misconstrued as just another expense to factor into your budget. While it certainly is true that you will have to pay a premium periodically for any kind of insurance, did you know that insurance can also help you save money in the process? Yes, that’s right. 

 

Among the many insurance benefits available today, one of the most underrated advantages is that you can save money in different ways with an insurance policy backing you up. Depending on the kind of insurance you purchase, and the purpose for which you do so, you can save money in various ways. 

 

Here is a closer look at the common heads of expense that are reduced or eliminated, thanks to insurance, and the ways in which you can save money with an insurance cover.

 

 

  • You do not need to pay out of pocket for unplanned contingencies

 

The basic principle of insurance is itself protection from the financial repercussions of unplanned contingencies. So, one of the main advantages of insurance is that you need not worry about shelling out huge sums of money in case of an emergency. This includes any major repair to your house following a natural disaster or calamity, any unexpected medical treatment needed, a major overhaul or service for your vehicle following an accident, or a massive loss following cancellation of your international flight. 

 

As you can see, these expenses can take a huge chunk of your savings. But with the right kind of insurance plan backing you up, you can rest assured that you need to spend such significant sums out of pocket. So, in exchange for a small premium, you can purchase a cover that will protect you from these big spends or losses, in case they occur. This is one of the main ways in which you can save money with insurance. 

 

 

  • Insurance leaves you free to save money in other ways

 

If you do not have the required insurance covers in place, you will have to build up an emergency fund that is large enough to cover the contingencies mentioned in the section above. Another rule of thumb that people follow is the principle of saving around six months’ worth of income as an emergency fund. In case any unexpected financial emergency comes to pass, you will have to use up most of your emergency fund and start saving from scratch again.

 

However, an insurance cover can save you the trouble of going back to square one. And it helps free up some room in your budget for saving and investing in other ways. You can invest in long-term assets and schemes that can help you fulfill various life goals such as buying your first home, saving up for your children’s education and wedding, and building a retirement fund. 

 

 

  • You can combine insurance and savings

 

Some insurance plans also help you save money actively and directly, thanks to the dual advantages of insurance and investments or savings. Take the case of savings plans, for instance. True to their name, savings plans have a savings component that makes it easy for you to save money consistently over the years, all through the policy term. All you need to do is pay your premiums consistently. 

 

These plans, also known as endowment plans, come with a guaranteed savings component that you can enjoy at the time of plan maturity. If you are the insured person, and if you survive the policy term, your insurance provider will pay out the maturity benefits when the plan matures. These financial insurance benefits can be used to fulfill the long-term life goals that may coincide with the end of the policy term. 

 

 

  • You can reduce your tax liability with insurance

 

And last, but certainly not the least, are the tax benefits that insurance offers. Not all kinds of insurance offer tax saving advantages. Life insurance and health insurance are the two key types of insurance that help you save money by reducing your tax liabilities. Here is a closer look at how these two kinds of insurance can help you save tax. 

 

How life insurance can help you save tax 

The premiums that you pay for life insurance can be deducted from your total taxable income, as per section 80C of the Income Tax Act, 1961. The maximum amount of deduction you can claim under this section is Rs. 1.5 lakhs. So, for instance, if your total taxable income is Rs. 20 lakhs, and your annual life insurance premium is Rs. 2 lakhs, you can claim Rs. 1.5 lakhs as a deduction, bringing your total taxable income down to Rs. 18.5 lakhs. 

 

In addition to the deduction benefits available on premiums, the death benefits or the maturity benefits paid out are also exempt from tax in the hands of the receiver, as per section 10(10D) of the Income Tax Act, 1961. 

 

How health insurance can help you save tax

The premiums you pay for your health insurance plan are also deductible from your total taxable income, thanks to section 80D of the Income Tax Act, 1961. The maximum amount of deduction allowed depends on the person for whom you have purchased the health insurance plan, as well as the age of the person. 

 

Here is a preview of the deduction limits under this section.

 

Insurance purchased for

Age of the insured person

Maximum amount of premium deductible

Self, spouse or children

Below 60 years of age

Rs. 25,000

Self, spouse or children

Above 60 years of age

Rs. 50,000

Parents

Below 60 years of age

Rs. 25,000

Parents 

Above 60 years of age

Rs. 50,000

 

Wrapping up

These are the many ways in which insurance can help you save money. If you are on the fence about buying insurance because of the added costs due to the premium, you can now rest assured that insurance can help you save money in many other ways. 

 

Up next, we discuss the key insurance regulations that you should be aware of before you go ahead and buy your insurance cover. So, head to the next chapter to know the legal framework involved in insurance. 

 

A quick recap

  • Among the many insurance benefits available today, one of the most underrated advantages is that you can save money in different ways with an insurance policy backing you up. 
  • The basic principle of insurance is itself protection from the financial repercussions of unplanned contingencies. So, one of the main advantages of insurance is that you need not worry about shelling out huge sums of money in case of an emergency. 
  • An insurance cover can save you the trouble of going back to square one. And it helps free up some room in your budget for saving and investing in other ways. 
  • Some insurance plans also help you save money actively and directly, thanks to the dual advantages of insurance and investments or savings. 
  • And last, but certainly not the least, are the tax benefits that life and health insurance offer.

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