Buying Life Insurance in 2025: What Has Changed
If you’re planning to buy life insurance in 2025, you're stepping into a space that's no longer shaped by old rules. Over the past year, life insurance has gone through a quiet evolution. Between regulatory shifts, budget announcements and better consumer protection norms, the product you're buying today looks different from what it did even a year ago. Some changes are about better payouts, some are tax-focused and a few aim to make insurance more accessible and transparent.
For those unfamiliar what is life insurance? It is a financial product that offers protection to your family by providing a lump sum amount in case of your untimely death and, in some cases, maturity benefits if you survive the term.
Let’s walk you through what’s changed and how it can shape your decisions going forward.
A More Policyholder-Friendly Surrender Value Rule
Earlier, exiting an insurance policy early meant walking away with almost nothing. That’s no longer the case. If you’ve completed just one full year of premium payments, you're now eligible to receive a surrender value. This is a significant move for anyone unsure about long-term commitment or navigating changing financial priorities.
What makes this even more relevant is the new method for calculating the Special Surrender Value. Insurers must now ensure that this value reflects the present worth of your paid-up sum insured, plus any accrued benefits. Simply put, the calculation has become more transparent and, in many cases, more favourable for the policyholder.
For instance, if you bought a non-participating guaranteed endowment plan and decided to exit after the first year, earlier you’d get nothing back. Now, depending on the policy terms, you could recover a large part of what you paid. The regulator has ensured that the surrender value now has to meet a minimum benchmark tied to government securities' returns, with an added buffer of 0.5%.
TDS on Insurance Payouts: Better Margins for Policyholders
TDS (Tax Deducted at Source) on life insurance payouts has seen a welcome adjustment. The rate has been reduced from 5% to 2% on payouts exceeding Rs 1 Lakh. This means more in-hand money when you receive maturity or survival benefits from your plan.
It’s especially useful if you hold traditional policies that offer guaranteed benefits or those that participate in company profits. However, there's a clause to be mindful of. For policies issued after April 1, 2023, if your annual premium crosses Rs 5 Lakh, the benefits become taxable. But if your policy premium stays below this limit, you're still eligible for tax-free maturity returns under Section 10(10D) of the Income Tax Act.
Budget 2025 and the Tax Shift in ULIPs
If you’re someone who prefers market-linked options like ULIPs (Unit Linked Insurance Plans), then the 2025 budget brought a few notable changes for you too.
Earlier, ULIPs with annual premiums above Rs 2.5 Lakh attracted long-term capital gains (LTCG) tax at the time of withdrawal. Now, this has been extended. Even ULIPs that do not qualify for tax exemptions under Section 10(10D) will be taxed under the “Capital Gains” category. This shift is expected to make high-premium ULIPs slightly less appealing for those looking purely at tax efficiency.
On the brighter side, it reduces the tax burden for smaller-ticket ULIP holders. If your policy premium is below Rs 2.5 Lakh, the older tax benefits continue to apply, giving you more breathing room when planning long-term investments.
Withdrawals, too, are affected. If you pull out your ULIP earnings after a year and your premium is below the Rs 2.5 Lakh threshold, you’ll now face a 12.5% tax on gains. However, you still get an LTCG exemption of up to Rs 1.25 Lakh per year, which can soften the blow.
Section 80C and 10(10D): Still Holding Ground
The classic tax-saving pillars of life insurance continue to hold their ground. Premiums up to Rs 1.5 Lakh annually are still eligible for deduction under Section 80C. This applies whether you’re buying a policy for yourself, your spouse or your children. It’s a key factor to consider, especially if you’re opting for the old tax regime, which continues to offer more exemptions and deductions compared to the new regime.
Section 10(10D) also remains relevant. As long as your policy meets the conditions, your maturity proceeds and survival benefits can be excluded from your taxable income. This continues to make life insurance a tax-efficient product in the long run.
Final Thought
These updates mark a shift towards greater fairness and clarity for policyholders. Early exits are no longer as punishing, tax savings are better defined and high-value policies now come with clearer terms.
Life insurance in 2025 has been shaped to be more transparent and more responsive to policyholder needs. Still, no two policies are alike. Your benefits will depend on what you choose, how much you pay and when you exit. If you're unsure where to start or which policy suits you best, using a life insurance calculator can give you clarity on coverage needs, premiums and potential tax benefits. With rules more in your favour than before, now’s a good time to make informed moves.
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