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Traditional Indian wisdom dictates saving as the primary way for money management. Fixed deposits have been India’s go-to investment avenue for many years. Life insurance schemes on the other hand are ideal for providing financial security after the death of the policyholder. 

Ideally, these two products should not be compared as the two serve very different purposes. One is a savings product and the other is an insurance scheme.

FD vs Life Insurance 

Life insurance is a type of insurance that offers financial stability to the insured’s family in the case of the policyholder’s untimely death. Apart from 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 plans and endowment plans. Endowment plans provide a lump-sum payment as a maturity benefit, whereas money-back plans provide income at regular intervals along with the death benefit. Furthermore, typical life insurance plans provide assured pay-outs as well as 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 specified by the bank at the beginning of the tenure.

Fixed Deposits and Life Insurance Policies: A Comparison

Tenure

Fixed deposits are available for terms ranging from 7 days to 10 years, and can be utilised for both long 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 benefit

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 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 10 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 interest is calculated by the bank on a quarterly basis based on the quantity of money invested. 

On the other hand, the premium for a life insurance policy varies based on the plan and is decided by a range of factors such as the policyholder’s age, the policy’s value, the insured’s health, and so on. You can get investment returns as a maturity benefit at the completion of 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.

The monthly income plan version of a life insurance scheme provides you with a guaranteed and consistent stream of income. 

Withdrawal

Fixed deposit schemes are partially withdrawable. Breaking an FD account before it matures, however, 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 make a withdrawal 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.

Conclusion

While fixed deposit programmes help you create a habit of saving, life insurance plans provide you with financial security so that you can 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 rather compulsory for all individuals above 18 years of age, an FD depends on the financial goals of the individual.

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