Insurance is the part of a plan that does nothing when things go well and everything when they do not. That is why it comes before investing in the order I follow: a portfolio built over ten years can be taken apart in a month by one hospital bill or one lost salary. This module sizes term life cover in rupees, reads the health insurance rules that IRDAI has written down, works out by hand what a savings plan with insurance attached really returns, and sets out the tax treatment for FY 2026-27. This is education, not advice for your money.
- Life coverReplace the income the family would lose.
- Health coverPay the bill that would force a sale.
- Keep them separatePure risk in one place, saving in another.
- Read the taxLimits differ by policy, date and regime.
The four questions of this module. The emergency fund of module 20.1 sits beside them.
5By the end you can
- Size term life cover with the human life value method and the expense method, in rupees, and say which input moves the answer most.
- Read a health policy for sum insured, waiting periods, sub-limits, co-pay, cashless and portability against IRDAI's rules.
- Work out the return of an endowment style plan by hand and compare it with term cover plus a separate investment.
- Read the minimum surrender values and the minimum sum assured that the 2024 regulations fix.
- Apply section 126, Schedule XV and Schedule II of the Income-tax Act, 2025 to a policy, with their premium limits.
3 terms this section turns on
What insurance is for
An insurance contract moves a loss that would break the household's finances onto a pool, in exchange for a premium. Two losses qualify for most households: the earner's income stops, or a medical bill arrives that the emergency fund cannot absorb. A loss small enough to pay from savings is not worth insuring, because the premium includes the insurer's costs and margin.
Read one more paragraph, 99 words
Two regulations carry most of the rules this module reads. IRDAI (Insurance Products) Regulations, 2024 were notified on 20 March 2024 and published in the Gazette on 22 March 2024. Schedule I covers life insurance products and Schedule III covers health. IRDAI's Master Circular on Health Insurance Business (reference IRDAI/HLT/CIR/PRO/84/5/2024, 29 May 2024) and its Master Circular on Life Insurance Products (IRDAI/ACTL/MSTCIR/MISC/89/6/2024, 12 June 2024) fill in the detail. Both circulars are reviewed every year. I read the copies on IRDAI's website on 31 Oct 2026 and found no later health master circular; check irdai.gov.in for a newer one.
Term life cover
Term cover is pure risk. It pays a sum assured if the insured dies during the term and nothing at the end if the insured lives. That absence of a maturity payment is why it costs far less per rupee of cover than a plan that also saves. The premium depends on age, health, term and the insurer's pricing, so this module does not quote one.
Read one more paragraph, 110 words
The regulation sets a floor on how small the cover can be, and it is a floor on product design, not a test of what a family needs. Schedule I, clause 3 of the 2024 Regulations says a life product's sum assured on death must be at least 7 times the annualised premium if the entry age is under 50, and 5 times if 50 or more (1.25 and 1.10 times for a single premium). A plan with a ₹50,000 premium could therefore have a sum assured as low as ₹3.5 lakh. Whether that is enough cannot be read off a regulation. It comes from the household's own sheet, next.
How much life cover: two methods worked in rupees
Two methods are in common use. The human life value method values the earner's future contribution to the household. The expense method adds up what the household would need if the earner were gone. They answer the same question from two sides, and a gap between them tells you which input is doing the work.
C = yearly income less own spends
n = working years left
r = real discount rate
Human life value: a 32 year old, 28 working years left
An illustration with invented inputs. Take home income ₹12,00,000 a year. The earner's own spends are ₹3,00,000, so the contribution to the household is C = ₹9,00,000. Working years to age 60: n = 28. Real discount rate: 3%.
| Real rate | Factor (28 years) | HLV |
|---|---|---|
| 2% | 21.281 | ₹1.92 crore |
| 3% | 18.764 | ₹1.69 crore |
| 4% | 16.663 | ₹1.50 crore |
| 5% | 14.898 | ₹1.34 crore |
Contribution C = ₹9,00,000 a year for 28 years. Illustration with invented inputs.
Read 3 more paragraphs, 120 words
The annuity factor is [1 minus 1.03 to the power minus 28] divided by 0.03, which is 18.764. HLV = 9,00,000 x 18.764 = ₹1,68,87,697 using the unrounded factor, about ₹1.69 crore. Less ₹25,00,000 of savings set aside for the family, the cover to examine is ₹1,43,87,697, about ₹1.44 crore, or 12.0 times annual take home income.
The real rate is the input that moves the answer most. Here is the same earner at four rates:
A three point swing in the real rate, from 2% to 5%, moves the HLV by about ₹57 lakh, 30% of the 2% figure. A method that is this sensitive is an estimate of a range, not a number to carry to the decimal.
Factor (28 years): the largest is 2% at 21.281
The expense method: what the household would need
Same household. After the earner's death the household needs ₹6,60,000 a year, ₹55,000 a month, for 25 years. The home loan outstanding is ₹38,00,000. A child's education goal is ₹30,00,000 in today's rupees. Final expenses and a one time buffer come to ₹3,00,000. All amounts are in real terms, so the 25 years of spending is discounted at the same 3% real rate: 6,60,000 x 17.413 = ₹1,14,92,677.
| Item | Amount | Basis |
|---|---|---|
| Household spends for 25 years | ₹1,14,92,677 | 6,60,000 x 17.413 at 3% real |
| Home loan outstanding | ₹38,00,000 | Cleared at the date of death |
| Education goal | ₹30,00,000 | In today's rupees |
| Final expenses and buffer | ₹3,00,000 | One time |
| Total need | ₹1,85,92,677 | About ₹1.86 crore |
| Less assets set aside | ₹25,00,000 | Savings and investments |
| Cover to examine | ₹1,60,92,677 | About ₹1.61 crore, 13.4 times income |
Where a regulation floor meets a family need: a ₹50,000 premium at the minimum 7 times multiple allows a sum assured of ₹3.5 lakh. The worked household's range is ₹1.44 to ₹1.61 crore, 41 to 46 times that. Whatever a household decides, the minimum in the regulation is not the number to read it against.
Read one more paragraph, 82 words
The methods land at ₹1.44 crore and ₹1.61 crore, both between 12 and 13.5 times annual income. The gap of ₹17 lakh comes mostly from the home loan and the education goal, which the HLV method does not itemise. Read the pair as a range. Cover through an employer's group scheme ends with the job, so it is left out of existing cover here. Death proceeds are exempt in the recipient's hands (tax section below), so no tax grosses up the sum.
Health insurance: what a policy sets
A health policy pays for hospital treatment up to a sum insured. Six terms decide how much of a given bill it pays.
- Sum insured. The most the policy pays in a policy year.
- Individual or floater. An individual policy gives each member a separate sum insured. A family floater gives one sum insured that any member can draw on and all members share.
- Waiting periods. Time from the start of the policy during which specified treatments are not covered. Three kinds appear in the rules, below.
- Sub-limits and room rent limits. A pre defined cap on one cost, such as room rent per day or a named procedure. The insurer pays nothing above it.
- Co-payment and deductible. A co-payment is a percentage of an admissible claim that the policyholder pays. A deductible is a fixed amount below which the insurer does not pay, taken out of the claim.
- Cashless or reimbursement. The insurer pays the hospital directly, or the family pays and claims back.
Read one more paragraph, 80 words
IRDAI wants these terms in front of the buyer. The Master Circular of 29 May 2024, paragraph 4, requires a Customer Information Sheet that states the sum insured, the cover, a summary of exclusions, sub-limits, deductibles, waiting periods, free look period, renewal, migration, portability and the moratorium. An acknowledgement of the sheet, in physical or digital form, is taken from the policyholder. The sheet is short. It is also the page where a ₹5,000 room rent limit would be stated.
A claim worked: room rent limit and co-payment
An illustration. Sum insured ₹10 lakh. The policy limits room rent to ₹5,000 a day and carries a 20% co-payment. The family takes a room at ₹8,000 a day, and the total bill is ₹4,00,000. Where a policy ties other charges to the room limit, the insurer reduces those charges in the ratio of the permitted room rent to the room actually taken. Whether it does is stated in the policy wording, so this is a reading exercise.
Two terms to hold on to from 20.2
Read one more paragraph, 51 words
The sum insured was never the constraint. The wording was. A policy with no room rent limit and no co-payment would have paid all ₹4,00,000. The number worth comparing is rupees paid by the family on a bill of a size they fear, not the sum insured on the front page.
Floater against individual
A family of four, a floater of ₹10 lakh against four individual policies of ₹5 lakh each. Four bills in a year, in rupees paid by the insurer:
| Claims in the year | Floater ₹10 lakh | Individual ₹5 lakh each |
|---|---|---|
| One bill of ₹7 lakh | ₹7 lakh | ₹5 lakh |
| Two bills of ₹3 lakh | ₹6 lakh | ₹6 lakh |
| Two bills of ₹6 lakh | ₹10 lakh | ₹10 lakh |
| Three bills of ₹4 lakh | ₹10 lakh | ₹12 lakh |
Arithmetic only: each insurer payment is the lower of the bill and the remaining sum insured. Premiums are not compared.
The floater wins when one member has a large bill. Individual policies win when several members claim in the same year. The table shows the shape of the trade.
Where this section sits in module 20.2
The IRDAI rules, read and dated
These are the rules in the 2024 Regulations (Schedule III, notified 20 March 2024) and the Master Circular on Health Insurance Business (29 May 2024), checked against the PDFs on IRDAI's website on 31 Oct 2026.
| Rule | What the text says | Where |
|---|---|---|
| Pre-existing disease waiting period | Up to 36 months of continuous coverage for diseases disclosed by the person. Insurers may offer less. | Schedule III, clause 7 |
| Pre-existing disease defined | A condition diagnosed, or treated or advised on, not more than 36 months before the policy starts. | Schedule III, clause 1.6 |
| Specific waiting period | Up to 36 months from the start, for named diseases or treatments, except accidents. | Schedule III, clause 1.7 |
| Moratorium | After 60 continuous months of cover, including time ported or migrated, no policy or claim can be contested for non disclosure or misrepresentation, except established fraud. | Schedule III, clause 8; Master Circular, para 13 |
| Premium during the term | Unchanged for the policy term. Loadings at renewal are at portfolio level, not on one policyholder's claims. | Schedule III, clauses 4.1 and 9.4 |
| Renewal | Cannot be denied because a claim was made (benefit policies that end on payment, such as critical illness, are the exception). No fresh underwriting unless the sum insured goes up. | Schedule III, clause 9; Master Circular, para 10 |
| Grace period | 15 days if premium is monthly, 30 days otherwise. Continuity credits are kept if renewed within it. | Master Circular, para 8 |
| Portability | Existing insurer to share data within 72 hours through the industry's information bureau. Acquiring insurer to decide within 5 days of receiving it. Sum insured, bonus and waiting period credits move across. | Master Circular, para 12 |
| Cashless approval | Decision on a cashless request within one hour. Final authorisation for discharge within three hours; any extra hospital charge beyond that is borne by the insurer. | Master Circular, paras 15 and 16 |
| Ombudsman awards | To be honoured within 30 days; failing that, ₹5,000 a day is payable to the complainant. | Master Circular, para 20 |
Read 2 more paragraphs, 135 words
Two of these rewrite what people assume. The pre-existing disease period is a ceiling on what an insurer may ask, not a fixed period. And the 60 month moratorium counts ported time, which is why the credits that move with portability matter. Premium is fixed for the policy term, but a new term starts at renewal and its premium can differ, within the portfolio level loadings rule.
Cashless approval within an hour is the insurer's obligation under the circular. It is not a promise that a particular hospital will take part in cashless treatment under a given policy, which depends on the insurer's network of hospitals and is for the family to check before a need arises. The Master Circular also asks insurers to aim for 100% cashless settlement, with reimbursement kept to exceptional cases.
Why mixing insurance with investment usually costs
An endowment style plan pays the sum assured if the insured dies in the term, and a maturity benefit if the insured survives. The premium covers both the insurance and the saving. The cost shows up as a low return on the saving part. The way to find it is the internal rate of return, the discount rate at which the premiums paid and the benefit received have the same present value. You can do it with a calculator and two guesses.
₹100 in Dynamic Asset Allocator became about ₹388 in the model
F(r) = [1 - (1+r)^-n] / r x (1+r)
P = premium paid at the start of each year
M = benefit at the end of year n
| Trial rate | PV of premiums | PV of ₹15 lakh | Difference |
|---|---|---|---|
| 3% | ₹7,66,190 | ₹8,30,514 | +₹64,324 |
| 4% | ₹7,06,697 | ₹6,84,580 | -₹22,117 |
| Assumed return before tax | After 20 years, after tax | Against ₹15 lakh |
|---|---|---|
| 6% | ₹13,31,102 | Lower by ₹1.69 lakh |
| 8% | ₹16,57,776 | Higher by ₹1.58 lakh |
| 10% | ₹20,83,088 | Higher by ₹5.83 lakh |
₹36,000 invested at the start of each year for 20 years, tax at 13% on gains above ₹1.25 lakh. The returns are assumptions, not forecasts and not a promise of any rate.
Read 4 more paragraphs, 302 words
An illustration with hypothetical inputs. Premium ₹50,000 a year at the start of each year for 20 years, ₹10,00,000 in total. A maturity benefit of ₹15,00,000 at the end of year 20, including any bonus, as a plan's benefit illustration might show. The numbers are invented for the method. Use the figures on a real illustration.
At 3% the benefit's present value is larger, so the true rate is higher. At 4% it is smaller, so the rate is lower. Interpolate: 3 + 64,324 / (64,324 + 22,117) = 3.74%. A solver gives 3.72%. The plan returned about 3.7% a year on money handed over for 20 years, before the value of the insurance cover in it.
The question that follows is what a separate arrangement would have done. Suppose pure term cover of ₹1.5 crore costs ₹14,000 a year for the same person (a hypothetical figure; ask for quotes). The remaining ₹36,000 of the same ₹50,000 goes into an investment. How much would that investment need to earn to reach ₹15 lakh by year 20? Solving gives 6.56% a year, ignoring tax. The next table shows what the ₹36,000 a year grows to at three assumed returns, with the gain taxed at the long term rate for listed equity, 12.5% plus 4% cess (13%) above ₹1.25 lakh, under sections 198 and 196 of the Income-tax Act, 2025:
The comparison is not a verdict. The plan's maturity benefit is contractual if it is stated that way, while the invested ₹36,000 carries market risk. A reader who wants the contract pays for it in the gap between 3.7% and 6.56%. The arithmetic also shows the cover: for the same ₹50,000, the plan's cover is ₹5 lakh, 10 times the premium, and the separate term cover is ₹1.5 crore, about 1,071 times its premium.
Leaving early: the minimum surrender values
An endowment plan is priced for a long hold. Schedule I, clause 4(A)(a) of the 2024 Regulations sets the minimum surrender value for non linked savings products, other than single premium, as a share of total premiums paid, less survival benefits already paid. It is acquired once premiums have been paid for at least two consecutive years:
| Year of surrender | Minimum share of premiums paid | On ₹50,000 a year |
|---|---|---|
| 2nd | 30% | ₹30,000 of ₹1,00,000 |
| 3rd | 35% | ₹52,500 of ₹1,50,000 |
| 4th to 7th | 50% | ₹1,25,000 of ₹2,50,000 in year 5 |
| Last two years | 90%, reached by smooth progression | Moves towards 90% of premiums paid |
Schedule I, IRDAI (Insurance Products) Regulations, 2024. These are floors. The insurer may pay more, and any accrued bonus or accrued additions are added to them (clause 4(A)(a)(3)). The surrender value paid is the higher of this and the special surrender value.
Read 2 more paragraphs, 91 words
On the worked plan, surrender in year 5 pays at least ₹1,25,000 against ₹2,50,000 paid, a loss of at least ₹1,25,000 before counting what the ₹2,50,000 could have earned. The Master Circular on life products (para 26) asks insurers to curb mis-selling that leads to surrender or lapse. The cost of leaving early is written into the structure.
One more floor from the same regulation: for regular premium products the minimum death benefit is 105% of the total premiums paid to the date of the covered event (Schedule I, clause 3).
Tax treatment for FY 2026-27
FY 2026-27 is tax year 2026-27 under the Income-tax Act, 2025, in force from 1 April 2026 (section 1(3)). The sections below are the successors of the 1961 Act provisions most readers know. I read them in the Act as published in the Gazette on 21 August 2025; the Finance Bill, 2026 as introduced on 1 February 2026 did not amend them, and I did not read the final Finance Act, 2026.
| Item | 1961 Act | 2025 Act |
|---|---|---|
| Life insurance premium deduction | 80C | Section 123 and Schedule XV |
| Health insurance premium deduction | 80D | Section 126 |
| Proceeds of a life policy | 10(10D) | Schedule II, Sl. No. 2 |
| Maturity above the limit, non unit linked | 56(2)(xiii) | Section 92(2)(l) |
| Policy issued | Annual premium to sum assured | Aggregate premium cap |
|---|---|---|
| 1 Apr 2003 to 31 Mar 2012 | 20% or less | None |
| 1 Apr 2012 to 31 Mar 2013 | 10% or less | None |
| 1 Apr 2013 to 31 Jan 2021 | 10% or less (15% special policy) | None |
| 1 Feb 2021 to 31 Mar 2023 | 10% or less (15% special policy) | ₹2,50,000 a year for a unit linked policy |
| On or after 1 Apr 2023 | 10% or less (15% special policy) | ₹2,50,000 unit linked; ₹5,00,000 other |
Schedule II, Sl. No. 2, Income-tax Act, 2025. "Aggregate premium" adds the premiums of all such policies in any tax year of their term. Policies issued by the IFSC Insurance Office on or after 1 April 2025 are outside the aggregate caps.
Read 6 more paragraphs, 455 words
The deductions are for the old regime only. The default regime, section 202, computes total income without Chapter VIII deductions except a short list (sections 124(1), 124(2), 125(2) and 146, section 202(2)(a)(xii)). Sections 123 and 126 are not on that list. A taxpayer who opts for the old regime under section 202(4) can claim them. Which regime costs less is a computation for each household.
Life premium, section 123. Up to ₹1,50,000 a year in total with the other items in Schedule XV. For the premium on a policy, Schedule XV, paragraph 2 allows only so much of it as is up to 10% of the actual capital sum assured for a policy issued on or after 1 April 2012 (20% for a policy issued on or before 31 March 2012; 15% for a policy issued on or after 1 April 2013 on the life of a person with a disability or a specified disease). On the worked plan, a ₹50,000 premium needs a sum assured of at least ₹5 lakh to be fully eligible.
Health premium, section 126. ₹25,000 for the individual, spouse and dependent children together, and a further ₹25,000 for parents. Where the person insured is a senior citizen, the ₹25,000 becomes ₹50,000. Within each limit, up to ₹5,000 can be a preventive health check-up, which can be paid in cash; premium must be paid by a mode other than cash. If two senior parents and a senior self are covered, the arithmetic reaches ₹1,00,000.
Proceeds, Schedule II Sl. No. 2. A sum received under a life policy, bonus included, is not part of total income if the policy meets the condition for its issue date. A sum received on death is exempt without the premium conditions (the exceptions are keyman policies and one case in section 127(4)).
If a non unit linked policy fails the test, the sum received above the premiums paid and not claimed as a deduction is income from other sources (section 92(2)(l)), taxed at the slab. A unit linked policy that fails is treated as a capital asset and taxed as capital gains. For the worked plan, the ratio is 10% with a sum assured of ₹5 lakh and the aggregate is far below ₹5 lakh, so the maturity benefit is exempt. With ₹6 lakh of premiums a year across non unit linked policies issued after 1 April 2023, the cap is breached and the gain is taxed.
GST is no longer part of the premium. From 22 September 2025, following the 56th GST Council meeting, individual life insurance (term, unit linked and endowment), individual health insurance including family floater policies, and reinsurance of them, are exempt (PIB, 3 Sep 2025). The exemption is for individual policies.
Where this goes wrong
- Tax saving as the reason for the policy. A ₹50,000 premium saves at most 31.2% of ₹50,000, which is ₹15,600, in the old regime at the top slab, and only up to ₹1,50,000 across all section 123 items. The return on the plan is a separate figure, 3.7% in the example. The default regime gives no deduction at all.
- Employer cover counted as personal cover. It ends when the job ends. Module 20.1's fund is sized as if income can stop, and personal cover is sized the same way.
- Hiding a pre-existing condition. A gap in disclosure can be used to contest a claim until 60 continuous months of cover are complete. Disclosure costs waiting time. Non disclosure puts the claim itself at risk until the moratorium ends.
Where this connects
Module 20.1 sizes the fund that pays a deductible or a co-payment. Module 20.3 prices the loans that the expense method clears. Module 4.6, Asset allocation for your goals and risk profile, treats cover as step two of the order and the mix as step four.
Key takeaways
- Cover comes before investing. Two losses justify it: the earner's income stops, or a large medical bill arrives.
- For the worked 32 year old, human life value at a 3% real rate is ₹1.69 crore, ₹1.44 crore after ₹25 lakh of assets. The expense method gives ₹1.61 crore. The real rate moves the first by about 30% across 2% to 5%.
- The 7 times annualised premium minimum in the 2024 Regulations is a product design floor, not an adequacy test.
- Room rent limit, co-payment and sub-limits decided a ₹4,00,000 claim more than a ₹10 lakh sum insured did. Read the Customer Information Sheet.
- IRDAI's 2024 rules: disclosed pre-existing disease waiting up to 36 months, a 60 month moratorium, renewal not refused for a past claim.
- An illustrative endowment plan of ₹50,000 a year for 20 years returning ₹15 lakh earns about 3.7% a year. The minimum surrender value in year 5 is 50% of premiums paid.
- Section 123 and 126 deductions apply in the old regime only. Maturity is exempt under Schedule II only within the premium to sum assured ratio and, from 1 Apr 2023, the aggregate caps of ₹2.5 lakh (unit linked) and ₹5 lakh.
Questions readers ask
Is a pre-existing disease covered from day one?
Not usually. IRDAI's Schedule III allows a waiting period of up to 36 months of continuous coverage for diseases disclosed by the person. Insurers may offer a shorter period, and the policy's Customer Information Sheet states it.
Is the maturity of an endowment plan always tax free?
No. Schedule II, Sl. No. 2 of the Income-tax Act, 2025 exempts it only if the annual premium is within 10% of the sum assured (15% for a special policy) and, for policies issued on or after 1 April 2023, the aggregate premium stays within ₹5 lakh for non unit linked and ₹2.5 lakh for unit linked policies. Death proceeds are exempt without those tests.
Can I claim a premium deduction in the default tax regime?
No. Section 202(2)(a)(xii) of the Income-tax Act, 2025 computes income in the default regime without the Chapter VIII deductions except a short list, and sections 123 and 126 are not on it. They are available in the old regime, chosen under section 202(4).
Rules and figures in this module were last verified on 31 Oct 2026. Tax and regulatory rules change; check the source before acting.
