FD vs Life Insurance Plans

03 April 2023
5 min read
FD vs Life Insurance Plans
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Traditional Indian wisdom dictates saving as the primary way for money management. Hence, fixed deposits have been India's go-to investment avenue for many years.

On the other hand, life insurance schemes are ideal for providing financial security after the policyholder's death. 

Ideally, one should not compare these two products as the two serve very different purposes. For example, one is a savings product, and the other is an insurance scheme.

FD vs Life Insurance 

Life insurance offers financial stability to the insured's family in the case of the policyholder's untimely death. Besides providing insurance coverage to the insured's family, it also assists in achieving long-term and short-term financial goals. 

Life insurance plans include a variety of investment alternatives, including money-back and endowment plans. Endowment plans provide a lump-sum payment as a maturity benefit, whereas money-back programs provide income at regular intervals along with the death benefit. Furthermore, typical life insurance plans offer assured payouts and an additional bonus. 

Fixed deposit is a banking product wherein you park a certain amount of money for a specified tenure, and you will receive interest on it at the rate determined by the bank at the beginning of the tenure.

Fixed Deposits and Life Insurance Policies: A Comparison

Here is a comparison between Fixed Deposits and Life Insurance based on various factors-

  • Tenure

Fixed deposits are available for terms ranging from 7 days to 10 years and can be utilized for long-term and short-term investments.

The life insurance policy provides both life insurance and guaranteed returns over longer terms, even until the age of 99, of the investor, and can be extended up to a lifetime. The only limit is that the investor should be a minimum of 18 years of age.

  • Tax Benefits

Life insurance premiums provide tax benefits under section 80 C of the income tax act. Section 10D of the act also gives tax benefits. Income on the maturity amount of a life insurance plan becomes tax-free if the premium paid for it is not more than 10% of the sum assured or the sum assured is at least ten times the premium. 

There are specific 5-year FDs as well that give tax benefits under section 80 C.

  • Investment Amount

One can start investing in fixed deposits with as little as Rs 1,000. There is no limit to the maximum investment. The bank calculates interest quarterly based on the quantity of money invested. 

On the other hand, the premium for a life insurance policy varies based on the plan. It is decided on various factors, such as the policyholder's age, the policy's value, the insured's health, and so on. In addition, you can get investment returns as a maturity benefit after a monthly income plan or a guaranteed return plan. There is also a concept of a no-claim bonus in some types of insurance.

  • Returns

Fixed Deposits provide a guaranteed return on the investment, as stated at the outset when the account is opened.

A life insurance scheme's monthly income plan version provides a guaranteed and consistent income stream. 

  • Withdrawal

Fixed deposit schemes are partially withdrawable. However, breaking an FD account before it matures affects the investment's interest rate, resulting in a low return on investment. Some banks also levy a penalty on withdrawal before the completion of the term.

In a life insurance policy, you can withdraw once the policy's three-year lock-in period has expired.

  • Taxation

FDs are not subject to Tax Deducted at Source (TDS), and the onus is on investors to make relevant disclosures at the time of tax declaration.

On the other hand, under sections 80C and 10 (10D) of the Income Tax Act 1961, you can receive a tax benefit on the premiums paid and the maturity funds from a life insurance policy.

Here is a table describing the difference between Life Insurance and Fixed deposits based on multiple factors-

Criteria

Fixed Deposits

Life Insurance Policies

Tenure     

Fixed deposits are available for seven days to ten years and can be utilized for long-term and short-term investments.

The life insurance policy provides life insurance and guaranteed returns over longer terms, even until the investor’s age of 99, and can be extended up to a lifetime. The only restriction is that the investor must be at least 18.

Tax benefit

There are specific 5-year FDs that also give tax benefits under section 80 C.

Life insurance premiums provide tax benefits under section 80 C of the income tax act. Section 10D of the act also gives tax benefits. Income on the maturity amount of a life insurance plan becomes tax-free if the premium paid for it is not more than 10% of the sum assured or the sum assured is at least ten times the premium.

Investment amount 

One can start investing in fixed deposits with as little as Rs 1,000. There is no restriction on the maximum investment. The bank computes interest quarterly based on the amount of money invested.

The life insurance policy premium differs according to the plan. It is decided on various factors, such as the policyholder's age, the value of the policy, and the insured's health, etc. In addition, you can get investment returns as a maturity benefit after a monthly income plan or a guaranteed return plan. There is also a concept of a no-claim bonus in some types of insurance.

Withdrawal

FD schemes are partially withdrawable. However, breaking an FD account before it matures impacts the investment's interest rate, resulting in a low return on investment. Therefore, some banks also put a penalty on withdrawal before maturity.  

One can withdraw once the policy's three-year lock-in period has expired.

Returns   

Guaranteed returns

A life insurance scheme's monthly income plan version provides a guaranteed and consistent income stream.

 

Taxation

FDs are not subject to Tax Deducted at Source (TDS), and the onus is on investors to make relevant disclosures at the time of tax declaration.

Under sections 80C and 10 (10D) of the Income Tax Act 1961, you can receive a tax benefit on the premiums paid and the maturity funds from a life insurance policy.

Conclusion

To sum up FD vs Life Insurance comparison, we can conclude that while fixed deposit programs help you create a habit of saving, life insurance plans provide financial security to deal with life's unforeseen events.

Both serve different purposes and cannot pit against each other. It is not an either/or option. While a life insurance policy is compulsory for all individuals above 18, an FD depends on the individual's financial goals.

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