Maintaining a foreign life policy

An Indian couple spends twenty years working abroad and buys life cover there. Then they come home. Does the cover have to be replaced?

The workbook's answer is no. They need not buy a fresh life insurance policy in India.

They have two ways to keep the existing policy alive. Pay the premiums out of income they still earn abroad, such as rent from a house there. Or remit the premium from India.

That settles two wrong ideas at once. Indian law does not forbid a person resident in India from buying or maintaining a life policy outside India. And becoming resident does not block the remittance of premiums to keep an existing policy going.

So the decision is a planning decision, not a legal one.

Health insurance is treated differently in the same case study, and the contrast is the examinable part.

The case the workbook builds it on. Section 20.3, Case 3. Mr and Mrs Gupta, both Indian citizens aged 45, worked with multinational companies in the USA for the last 20 years. They have given up those jobs and returned to India to run their own venture, funded by a Silicon Valley venture fund. Among their assets:

The question and the workbook's answer. Asked whether they must buy life insurance in India to cover the risk of death, the correct option is that they need not, and can either pay the premiums for the existing policy from their rental income in the US or remit it from India.

The two options it rejects are worth learning as wrong answers:

Contrast the health insurance answer in the same case. Their US health policies cover hospitalisation across the world, including India, and can be renewed. Even so, the workbook's answer is not simply to keep them. It is advisable to continue the existing policies and also buy an additional fresh health insurance in India — specifically to create a no claim history on an Indian health policy — even if there is an additional cost involved.

So the two products go opposite ways. Keep the foreign life cover; keep the foreign health cover and add an Indian one.

The tax questions the same case raises. The rental income from the US property becomes taxable in India once they are resident, with credit for the tax paid in the USA. And the income accruing on the tax deferred retirement account is taxed in India in the year of withdrawal, with credit for US tax, if the account is notified under section 89A of the Income Tax Act.

What the workbook does not give. It states no premium figure, no remittance limit and no cap for maintaining a foreign policy. The only figures in the case are the USD 1 million sums insured, the 15 year cover period, the 20 years of US employment and their age of 45. The Liberalised Remittance Scheme limit of USD 250 thousand appears in Chapter 17 in the context of investing overseas, not in this case study, so it should be cited to that chapter if cited at all.

Work the Guptas' own figures. Both 45, returning to India after 20 years, each holding USD 1 million of US life cover running for another 15 years.

Why keeping the cover is also the better financial answer. At 45, after 20 years of a policy priced at 25, their existing premium reflects the age at which they bought it. Buying Rs 8,00,00,000 of fresh Indian term cover at 45 — roughly the rupee equivalent of USD 1 million — would be priced at 45.

Illustrative, since the workbook quotes no premium for this case. Compare it with the chapter's own Indian quotation: a 30-year-old pays Rs 13,800 a year for cover to 60. A 45-year-old buying the same term today pays materially more, and would also face fresh underwriting and a fresh waiting period. The existing USD 1 million policy, already 20 years into its life, costs nothing to preserve except the premium remittance.

Where the 15 year window bites. Their US cover runs only to age 60. That matches the end of the earning phase, which is exactly where the workbook says an income replacement policy should end. So the tenure is already right; replacing it would be paying again for cover they have.

And why health insurance goes the other way. A worldwide US policy will pay an Indian hospital bill. What it cannot do is build an Indian claims record. Buy the Indian policy at 45 and the no claim history starts now; buy it at 60, after the US employer cover lapses, and it starts then — with fifteen years of medical history in between.

Chapter 20 (Case Studies), section 20.3, Case 3, is the returning-NRI case, and this is its third question. The four questions in the case are set together, so the life insurance answer is examined alongside the rental income, the section 89A retirement account and the health insurance answer.

Expect the multiple-choice question in the workbook's own form: must they buy fresh Indian life cover, and the correct answer is that they need not, and may pay the premiums from US rental income or remit from India. The distractors are always the two false prohibitions — that remittance will not be allowed, and that Indian law bars a resident from maintaining a life policy outside India.

• Indian law does not prohibit a resident from buying or maintaining a life policy outside India. This false prohibition is the workbook's own distractor, and it is the answer most candidates pick.
• Premiums may be remitted from India, or paid from foreign income. Both routes are open; becoming resident does not close either.
• Life and health go opposite ways in this case. Keep the foreign life cover as it is; keep the foreign health cover and add an Indian one to build a no claim history.
• The extra Indian health policy is advised even though it costs more. The reason is the claims record, not the cover, since the US policy already pays worldwide including India.
• The rental income is taxable in India with credit for US tax. Not exempt, and not taxable without credit.
• The tax deferred retirement account is taxed on withdrawal only if it is notified under section 89A. The section number is the examinable detail.
• The workbook gives no premium, no remittance cap and no limit for this case. The USD 250 thousand Liberalised Remittance Scheme figure belongs to Chapter 17 on home country bias, not to Case 3.