Fixed Deposit or Life Insurance –
Which one should you choose?
Which one should you choose?
Life insurance is a must-have tool in any financial portfolio because it offers financial security to your loved ones.
On the other hand, fixed deposits have been a well-established favourite among Indians for their safety and assured returns1.
While both products are considered secure with guaranteed benefits, they serve very different purposes. Let’s break down their differences to help you chose the right one based on your needs.
What are fixed deposits?
Fixed deposits are a type of savings scheme offered by banks, post offices and Non-Banking Financial Companies (NBFCs). You invest a lump sum for a fixed time at a fixed interest rate. At maturity, you get back your original amount plus interest.
What is life insurance?
Life insurance provides financial security in the form of a guaranteed payout to your family members if something unfortunate happens to you. There are a variety of life insurance plans that can help you build wealth or savings over time in addition to financial security.
What are the features and benefits of fixed deposits?
Below are some features and benefits of a fixed deposit:
- Guaranteed returns: Fixed deposits offer guaranteed interest and returns, decided at the time of investment
- Low risk: Risk associated with the FDs are low as the interest rate is pre-decided and the maturity amount is known in advance
- Loan against deposit: Fixed deposits allow you to borrow a loan against your investment without breaking the deposit
- Tax benefits: Life Insurance offers tax* benefits subject to conditions prescribed under Section 80C* , Section 10(10D)* and Section 80D* of the Income Tax Act, 1961
What is the difference between fixed deposit & life insurance?
| Point of difference | Life insurance | Fixed Deposit |
|---|---|---|
| Primary purpose | Life insurance provides financial protection with life cover` to your dependents in your absence | Fixed deposits allow you to build risk-free savings |
| Expected returns | Life insurance provides a death benefit payout. Some policies also have a cash value. The returns for these can vary, depending on the type of plan | Fixed deposits offer assured returns at maturity |
| Risk | The life cover` or sum assured is an assured payout decided while purchasing the policy. So, life cover` doesn’t carry much risk. However, some market-linked life insurance plans invest your premiums in market linked funds. These investments carry associated risks | Fixed deposits are generally risk-free because the interest rate is fixed at the time of opening the FD account |
| Liquidity | A pure protection policy offers limited liquidity as the payout is after the demise of the policyholder. However, some life insurance policies offer periodic incomes, return of premium, maturity and other cash benefits to support you with sufficient funds when needed | They have a fixed term, and withdrawals before maturity may result in penalties |
| Control | Life insurance policies offer more direct control to the policyholder in several key aspects. You have the power to decide the sum assured. In Unit Linked Insurance Plans (ULIPs), this control extends to choosing the investment funds (equity, debt, or hybrid) that align with your risk tolerance and financial objectives. You can also often switch between these funds. Moreover, you generally have control over the premium amount (within certain limits) and the payment frequency. This allows for a degree of customization based on your individual needs and financial situation | The primary control regarding returns lies with the bank. They dictate the interest rates offered based on market conditions and their policies. While you, as the investor, have the flexibility to choose the deposit amount, tenure, and the bank itself |
| Tax Benefits | Life insurance premiums are eligible for a deduction of up to ₹ 1.5 lakh under Section 80C* of the Income Tax Act, 1961. Additionally, the maturity proceeds are exempt under Section 10(10D)* | Fixed deposits with a tenure of five years qualify for deduction of up to ₹ 1.5 lakh under Section 80C* of the Income Tax Act, 1961. The interest income earned up to ₹10,000 from the FD is exempt from the tax as per Section 80TTA* of the Income Tax Act, 1961 |
Life insurance plans that can be used as investments
Some life insurance plans offer an investment component that allows you to build wealth for various goals. Let’s take a look at them:
ULIPs
Unit-Linked Insurance Plans (ULIPs) offer life insurance coverage and investment benefit under the same policy. They allow you to invest in equity, debt and hybrid funds~ and create wealth through compounding returns.
Endowment insurance plans
Endowment insurance plans offer life insurance coverage and low-risk savings benefit under the same plan. These are long-term savings plan in which you can save money for a specific goal like children’s education, retirement planning and other life goals. They are suitable for conservative investors and help build wealth for future needs.
Guaranteed returns plan
Guaranteed return# plans are another low-risk insurance cum savings plan. These plans offer a guaranteed return# at maturity, along with ensuring financial security for your loved ones throughout the policy term. The returns are fixed at the time of purchase of the plan.
Money back plans
Money back plans offer life insurance coverage along with regular periodic payouts. These plans offer regular payouts throughout the tenure and ensure financial liquidity for your recurring needs. These plans also provide the option of receiving all your premiums back upon maturity of the plan.
Conclusion
Life insurance or fixed deposits – which one should you choose? The answer depends on your financial goals.
If you prefer financial protection along with long-term savings, life insurance can be a comprehensive tool. However, if your goal is risk-free savings with assured returns and you do not require insurance coverage, fixed deposits offer a simple, hassle-free way to grow your money safely.
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