Fixed Deposit v/s Life Insurance: Where to Invest?
Ram Pandey wanted his son, Neerav, to be financially independent. On Neerav’s 18th birthday, Ram gifted him Rs.1 lakh. He asked Neerav to make a smart financial move and justify it. Neerav had read a lot about financial planning. He knew that life insurance should be one of the first steps. But Neerav then thought about his uncle, Mohan who was funding his daughter’s wedding with his fixed deposit (FD) money. This put Neerav in a dilemma. Should he buy insurance or invest in an FD?
Making The Following Comparisons Helped:
Different people have different financial goals. An 18-year-old may want to save enough to buy the latest smartphone. But a 30-year-old may want to invest for their child’s higher education. Neerav wanted to make the most of the money and opportunity given to him. He realised that an FD is an investment product that offers fixed returns. Meanwhile, life insurance offers protection to your family. Certain insurance policies can also work as investment tools. Unit-linked insurance policies (ULIPs) are an example. They invest a part of your premium in debt and equity. But the returns on such products are market-driven. So it is important to decide your financial goals before making any financial move.
Neerav wanted to use the money in a way that would bring him a regular income. FDs are a good way to ensure this. You can earn up to 8.10% on FDs. You can opt for a cumulative interest or a non-cumulative interest scheme. The former pays you the principal and the interest amount at the end of the tenor. The latter allows you to receive regular interest payouts. This could be every month, quarter, 6 months, or year. So you can receive regular interest payments or a lump-sum amount. Life insurance plans generally do not give you any payouts. But there is a way to receive a regular income on your insurance. You can buy plans such as money-back policies.
This was Neerav’s first time dealing with so much money. He wanted to ensure some liquidity as well. He wanted to be able to withdraw the money in an emergency. Both FDs and life insurance allow you to withdraw money before the end of the tenor. In the case of FDs, you can make premature withdrawals. In life insurance, you surrender the policy. Now, premature withdrawals on your FD attract a penalty. This may go up to around 1%. Also, your insurer might deduct certain charges before returning the premium to you. Besides, there is the tax angle to think about. Suppose you surrender your plan before the stipulated period. Then you will disallow all previous tax benefits that you availed.
Neerav had Rs.1 lakh at his disposal. But he did not want to put all his eggs in one basket. He wanted to know the minimum investment for both the schemes. This would help him diversify his investment. You can open an FD account with Rs.100 . But your minimum life insurance premium would depend on several factors. Your insurer might consider your age, gender, and the type of plan. Based on this, it would arrive at the premium amount.
Neerav is smart enough to know that taxation is important for financial planning. He read about the tax efficiency of both options. The premium amount on life insurance is deductible from your taxable income. But the amount cannot exceed Rs.1.5 lakh. Also, the maturity proceeds of life insurance are exempted from tax. The interest Rate on fd you earn is fully taxable.
A loan was another aspect that Neerav considered while making a choice. You can get a loan of up to 90% against your life insurance policy. This holds for your FD too. But you need to fulfil certain conditions in the case of the former. For example, you can avail a loan against your policy only if you have paid premiums for 3 years. Also, not all plans offer such a facility. You must know your plan well before buying insurance. To take a loan against an FD, you do not have to fulfil any major requirements. But your lender might ask for a small processing fee.
The Bottom Line
Neerav went through each parameter with care. He thought his father would be happy if he made provisions for the financial security of his family. He also knew his father would appreciate a plan that helped grow his funds. So, Neerav invested a part of the amount in a life insurance plan. He used the remaining amount to open an FD.
If you make a planning and confused between interest rates or Maturity amount, So Use Bajaj Finance FD Calculator for calculate Maturity amount and Interest rates on Year Basis.