According to traditional Indian wisdom, saving is considered the primary method of managing money effectively. As a result, fixed deposits have been a popular investment avenue in India for many years.
In contrast, life insurance schemes are designed to provide financial security to the policyholder’s family in the event of their death.
It is important to note that these two products serve different purposes, and therefore, should not be directly compared. Fixed deposits serve as a savings product, while life insurance schemes offer insurance coverage to provide financial protection to the policyholder’s beneficiaries.
FD vs Life Insurance Plans
Life insurance serves as a means of providing financial stability to the family of the policyholder in the event of an untimely death. In addition to providing insurance coverage, it can also be used to achieve both short-term and long-term financial goals.
Life insurance plans offer a range of investment options, including money-back and endowment plans. Endowment plans provide a lump-sum payment as a maturity benefit, while money-back plans provide regular income along with the death benefit. Moreover, traditional life insurance plans provide assured payouts and bonus benefits.
Fixed deposit, on the other hand, is a banking product that involves depositing a specified amount of money for a predetermined period. During the tenure, the bank pays interest at a rate decided at the start of the term.
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A Comparison Between Fixed Deposits and Life Insurance Policies
The following are the key points of comparison between fixed deposits and life insurance:
Tenure: Fixed deposits offer a range of tenures ranging from 7 days to 10 years, making them suitable for both short-term and long-term investments. Life insurance policies can provide returns and coverage for a more extended period, even up to the age of 99 years, and can be extended to a lifetime, with a minimum age limit of 18 years.
Tax Benefits: Life insurance premiums offer tax benefits under section 80 C of the income tax act, and section 10D of the Act provides additional tax benefits. Furthermore, the maturity amount of a life insurance policy is tax-free if the premium paid is not more than 10% of the sum assured or ten times the premium. Specific 5-year fixed deposits also provide tax benefits under section 80 C.
Investment Amount: Fixed deposits can be initiated with as little as Rs 1,000, with no maximum investment limit. The bank calculates interest quarterly based on the amount invested. Life insurance premiums vary based on the plan and are determined by several factors such as the policyholder’s age, value, health, etc. Additionally, you can receive returns as a maturity benefit or monthly income plan, with some policies providing a no-claim bonus.
Returns: Fixed deposits offer a guaranteed return on investment as stated at the beginning of the account. Life insurance policies offer a consistent income stream through monthly income plan versions.
Withdrawal: Fixed deposits can be partially withdrawn, but breaking the account before maturity reduces the interest rate and results in a low return on investment. Some banks may also levy a penalty on early withdrawal. In contrast, one can withdraw from a life insurance policy once the three-year lock-in period has ended.
Taxation: Fixed deposits are not subject to Tax Deducted at Source (TDS), and investors are responsible for making relevant disclosures at the time of tax declaration. Under sections 80C and 10 (10D) of the Income Tax Act 1961, premiums paid and maturity funds from a life insurance policy offer tax benefits.
Conclusion
Fixed deposits offer a guaranteed return over a fixed period of time, while life insurance provides financial security to the policyholder’s family and investment opportunities. Investors should consider their financial goals and circumstances before making a decision, as both options have their unique features and limitations. Ultimately, both fixed deposits and life insurance can be valuable components of a comprehensive financial plan.