Tax planning in March: How a multi-year health cover keeps premiums in check, offers tax benefits

Health insurance has a newfound significance today, especially in the post-pandemic world. At a time when medical inflation has been surging incessantly, health insurance has emerged as a safety net, offering comprehensive coverage.

Lifestyle diseases, and the cost of quality medical treatment, can drain your savings. This is when health insurance plays an important role. It not only acts as an emergency armour, but also offers multiple benefits, including hospitalisation expenses, day-care procedures, and cashless hospitalisation, among others. Health insurance also has tax benefits associated with it. Under Section 80 D of The Income Tax Act, 1961, a tax concession is provided on the premium paid towards health insurance policies. The financial year is nearing its end, and this is when many re-evaluate their financial planning and investment decisions.

While buying health insurance, individuals often come across multi-year policies. As the name clearly indicates, a multi-year health insurance policy is one that offers coverage for more than one year. It usually has a tenure of two-three years.

Advantages of buying multi-year health insurance policies

These policies have several advantages associated with them. In a yearly policy, you face the hassle of renewing every year, which can be inconvenient. If you fail to renew the policy on time, you may lose out on the benefits. On the contrary, multi-year health insurance policies, which can be bought for up to 3 years, can save you from those troubles by securing your coverage in one go for a specific number of years. To be clear, there is no need to renew a multi-year health insurance policy every year.

Secondly, in a yearly renewal policy, there is a chance of an increase in premiums. However, with multi-year health insurance policies, individuals get the advantage of locking in premiums for a specific period of time. This saves them from the burden of potential hikes, giving financial relief in times of inflation.

In addition to providing security for extended coverage, these policies also offer discounts and savings. Most health insurers offer up to 10 percent off on opting for a policy tenure of two years and up to 15 percent discount when choosing a three-year policy. Thus, these policies are more affordable and can easily be bought by the middle-income group. Multi-year health insurance policies could also be beneficial to senior citizens, who might have to pay a higher premium because of their age.

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Tax savings on premiums paid

An individual or Hindu Undivided Family (HUF) can claim tax deduction under Section 80 D of The Income Tax Act towards health insurance premiums. Tax deductions for health insurance policies have an upper limit of Rs 25,000 for self, spouse, dependent children or parents. The upper limit for family or parents who are senior citizens is Rs 50,000.

Tax concessions provided on an annual basis

Individuals purchasing multi-year policies often have doubts over tax-deductions. Tax deductions are determined proportionately for each year based on the policy’s duration, as per current tax deduction regulations. So, if an individual pays a lumpsum premium of Rs 60,000 for a health insurance policy spanning three years, s/he can claim Rs 20,000 each year as a tax deduction under Section 80D of The Income Tax Act. If senior citizens pay a premium of Rs 1.5 lakh as premium for a multi-year policy, the deduction limit will be Rs 50,000 each year, as per tax regulations. So, they can claim Rs 50,000 in the first year and the remaining amount subsequently, for the next two years.

Insurance companies also issue a tax certificate stating the amount that can be claimed under Sec 80D annually to avoid any confusion. It is to be noted that the mode of premium payment should not be cash to be eligible for tax deductions.

It’s important to note that some policies might also cover the policyholder's spouse's parents. However, the premium paid might not qualify for a tax deduction. Taxpayers who choose the new income tax regime won’t be able to avail of deductions as opposed to those who opt for old tax regime.

To sum up, a multi-year health insurance policy provides a host of benefits, making it a financially prudent choice to secure health coverage for a longer period. It provides the security of extended coverage, discounts on premiums, and locked-in premiums, thereby bypassing premium revision due to inflation or age, while offering tax benefits.

However, it should be noted that while tax benefits have long been the reason for many to buy health insurance, its purpose goes well beyond those benefits. A comprehensive health insurance policy acts as a raincoat during a health emergency, keeping you from falling into the bottomless pit of medical bills.