Applications of Life Insurance – Insurance Law and Practice Important Questions
Question 1.
Ricky has a personal accident policy that covers death by accident but excludes death by disease. He falls from his horse and suffers leg injuries. He is admitted to hospital but his leg wound turns septic and one week later he dies as a result of the disease septicaemia.
Explain whether the personal accident insurers are liable under the policy referring to relevant case law in support of your answer.
Answer:
The issue here is causation- the insurers would need to establish whether original accident was the proximate cause of Ricky’s death or was his death as result of septicaemia.
Where there is a ‘chain of events, the insurers are liable where the loss flows in an unbroken chain directly from an insured peril.
Equally, there is no liability if the loss flows from an excluded peril. Etherington v Lancashire and Yorkshire Accident Insurance Company (1909): The insured fell from the horse and suffered some injuries that force him to lie in cold and damp conditions so that he contracted pneumonia, of which he eventually died. It was held that the proximate cause of his death was the original ‘accident’ if the fail from the horse and not the disease that ultimately killed him (which was excluded).
Mardon Accident Insurance Co. (1903): The insured scratched his leg with his thumbnail while removing his socks, Six days later the wound turned septic, on the tenth day septicaemia set in and on the twentieth day the injured dies of septicaemia. The policy covered death by accident but excluded death by disease.
The Court in this case held that the proximate cause of death was accident and not the ensuing disease.
In this scenario, the ‘chain of events’ was unbroken in the sense that septicaemia was a natural consequence of Ricky falling from his horse and suffering the leg injury. The personal accident insurers would therefore be liable even though he died from septicaemia and excluded peril.
Question 2.
What is your opinion in linking insurance buying to Income tax sops? Discuss the tax benefits available to an individual for life insurance policies.
Answer:
A policyholder who takes a Life Insurance Policy is entitled to the following income tax benefits. Section 80C of the Income-tax Act, 1961 any premiums paid for Life Insurance Policy on the life of the person, his/her spouse or children is eligible for a deduction from the Gross Total income of the person.
The deduction is subject to the following conditions:
(i) The premiums paid in any year by the policyholder are allowed as a deduction up to a maximum amount not exceeding 10% (15% in case of certain persons with specified illness of ailments) of the Actual Capital Sum Assured under the Policy. Any amount in excess of the said 10%/15% will not qualify for deduction.
This deduction is not applicable to deferred annuity policies. Actual Capital Sum. Assured is the amount guaranteed to be paid by the Life Insurance Company on the happening of the events insured under the policy. However, such Actual Capital Sum Assured shall not include premiums agreed to be returned and Bonuses declared from time to time.
(ii) If the policyholder (other than annuity policy) discontinues the Policy within two policy years, no benefit is available in the second policy year. Besides, the deduction given in the first policy year will be treated as an income in the second policy year.
(iii) Deduction is allowed for the policies taken on the life of an individual, his wife/ husband and children.
(iv) Life Insurance Policies including deferred annuity policies are eligible. Pension policies are treated separately under section 80CCC of the Income-tax Act, 1961 hence, not eligible under section 80C of the Income-tax Act, 1961.
(v) Under section 80C of the Income-tax Act, 1961, many tax saving instruments are eligible for deduction and Life Insurance Policies is one amongst them.
(vi) The maximum amount which can be claimed as a deduction under section 80C,80CCC (deduction for pension policies) and 80CCD of the Income-tax Act, 1961 (contributions under the New Pension Scheme) cannot exceed ₹ 1,50,000/-.
Under section 80CCC of the Income-tax Act, 1961, the premiums paid for a pension policy issued by a Life Insurance company is eligible for deduction. Any amount received under a Pension Policy on account of surrender of the Policy or as pension (annuity payments) is taxable on receipt. The limit is ₹ 1,50,000/- which is subject to overall limit of deduction under all the three sections 80C, 80CCC and 80CCD of the Income-tax Act, 1961 all put together.
Section 80CCD of the Income-tax Act, 1961:
Central Government has notified contributions made under the New Pension Scheme administered by the Pension Funds Regulatory and Development Authority (PFRDA) as eligible for deduction under section 80CCD of the Income-tax Act, 1961. PFRDA collects contributions from subscribers and invests them as per fund options with some limited flexibilities, which can be selected by the Subscribers. PFRDA invests the funds of the subscribers like a Mutual Fund and manages them.
Private Sector, as well as self-employed persons, can join the New Pension Scheme and subscribe to the Scheme. Upon attaining the age of Superannuation at least 40% of the corpus must be utilized to purchase an annuity Policy from empanelled Life Insurance Company, who will then pay monthly annuity to the subscriber depending on the annuity option chosen.
Up to 60 years of the corpus can be withdrawn as commuted value at the time of superannuation. While the basic contribution under section 80CCD (I) of the Income-tax Act, 1961 is subject to the overall deduction under sections 80C, 8iOCCC and 80CCD of the Income-tax Act, 1961 put together, Section 80CCD (1B) of the Income-tax Act, 1961, provides additional ₹ 50,000/-deduction only for the contributions to the Pension scheme notified under the section by the Central Government i.e. PFRDA’s New Pension Scheme. The amount of contribution from employees is limited to 10% of salary.
Section 80DDD of the Income-tax Act, 1961:
A Life Insurance Policy taken by an individual who has a dependent with some specified disabilities under the Section will be eligible for deduction up to ₹ 75,000 per year for taking the Life Insurance Policy for such dependents. The deduction increased to ₹ 11,25,000 per year where such dependents have serious disabilities.
Such policies are taken by the Caretaker of such dependent (who must be a relative having insurable interest) on his own life and the dependent shall be the nominee who will get the benefits under the Policy. Upon the death of the caretaker. If the dependent predeceases the Caretaker, the amount allowed as deduction shall be deemed to be an income in the year in which such amount is received by caretaker and shall be taxed accordingly.
Section 10(10D) of the Income-tax Act, 1961:
In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included any sum received under a life instance policy, including the sum allocated by way of bonus on such policy, other than:
any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA of the Income-tax Act, 1961; or
any sum received under a Keyman insurance policy; or
any sum received under an insurance policy issued on or after the 1st day of April 2003 but on or before the 31st day of March 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured; or
any sum received under an insurance policy issued on or after the 1st day of April 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured:
Provided that the provisions of sub-clauses (c) and (d) shall not apply to any sum received on the death of a person:
Provided further that for the purpose of calculating the actual capital sum assured under sub-clause (c), effect shall be given to the Explanation to sub-section (3) of section 80C of the Income-tax Act, 1961 or the Explanation to sub-section
(2A) of section 88 of the Income-tax Act, 1961, as the case may be:
Provided also that where the policy, issued on or after the 1st day of April 2013, is for insurance on life of any person, who is
- a person with disability or a person with severe disability as referred to in section 80U of the Income-tax Act. 1961; or
- suffering from disease or ailment as specified in the rules made under section 80DDB of the Income-tax Act, 1961, the provisions of this sub-clause shall have effect as if for the words “ten per cent”, the words “fifteen per cent” had been substituted.
Question 3.
What are the tax implications in life insurance under the Income Tax Act of India?
Answer:
Tax Law Implications In Life Insurance:
Historically life insurance in India has been driven mainly by benefits doled out under the Income Tax Act, 1961. Different Sections under Income Tax Act, 1961 deal with benefits at the purchase, renewal and claim stages of a life insurance policy. Life insurance policies have been used a effective tax planning tools. Following are some of the Sections under the
Income Tax Act, 1961 dealing with tax benefits for life insurance policies:
Deductions under Sections 80C/80CCC/80D:
Under Section 80C of the Act, premiums paid by the Assessee on policies held by himself, spouse or children is eligible for deduction from gross total income. This is also applicable to a Hindu Undivided Family (HUF) where the Karta of he HUF pays premiums on policies held by any member of the HUF. Where the premiums payable under the policy exceeds 10% of the actual capital sum assured, the deduction is limited to 10% of the sum assured.
Section 8OCCC deals with contributions to approved pension products. It lays down that an individual assessee who has paid premiums out of his income chargeable to tax to effect or keep in force a contract for any annuity plan of Life Insurance Corporation 04 India or any other insurer for receiving pension from the fund aPproved under Section 10 (23AA8).
he shall be allowed a deduction in the computation of his total income, of the whole of the amount paid or deposited (excluding interest o bonus accrued or are(i.ted to the assessee’s account, it any) up to a maximum of ₹ 1.00.000 With previous year.
Section 80CCD deals with contributions to approved pension products by an individual assessee. It lays down that where an assessee. being an individual has In the previous year paid or deposited any amount in his account under a notified pension scheme. he shaM be allowed a deduction in the computation of his total income, of the whole of the amount so paid or deposited as does not exceed 10% of his salary (in case of Central Government employees) or 10% of his gross total income (in any other case) In the previous year.