Investment in Fixed Deposit or Life Insurance- Which one is better? Both are totally different in nature. Below are some vital differences between the two:
[1] Short term versus Long term financial need:
Fixed deposits are ideal for short term and medium term investments. Insurance on the other hand, is ideal for long term investments. As FDs are for a maximum of 10 years, they cannot be considered for long term planning like retirement, marriage etc. In long term planning, money is invested regularly for long period of time. The growth of investment istaken care of by ?compound interest? in the long run.
[2] Tenure:
Fixed deposits range from a minimum of 7 days to a maximum of 10 years. Insurance policies generally have tenure of 10 years and extending up to the whole life. For example, some whole life polices provide insurance benefits up to the age of 100 years.
[3] Investment Amount:
FDs can be taken for a sum as low as Rs.1000/-. As they are short term investment tools, the compounding effect is not much. Hence, an investor has to invest large sum to get substantial interest. Insurance being a long term product gets an added advantage of ?compound interest?. As the policy approaches towards maturity, the annual compound reversionary bonus becomes huge. Also, in a ULIP, it has been noted that there is a substantial increase in fund value if the money is invested for a longer period of time. The minimum premium is different for different policies and depends on age, gender, premium payment term, policy term etc.
[4] Guaranteed returns:
The interest in a Fixed Deposit is declared at the beginning of the contract whereas the bonus in life insurance is declared at the end of the year, bonuses once declared are guaranteed. ULIPs are purely market linked and the fund value is subject to market risks.Both the products are safe as the former is governed by RBI and the latter is governed by IRDA.
[5] Flexibility in withdrawal:
All investments which are goal oriented should not be withdrawn/broken mid-way. However both Fixed Deposit and Insurance can be withdrawn. FDs , if withdrawn, will attract lesser interest rate. Insurance policies can be surrendered subject to lock in period of 3 years for traditional and 5 years for ULIPs. Applicable surrender charges are also deducted.
[6] Tax Implications:
Insurance policies are triple exempted. This means that a person is not only entitled for rebate while making the investment, the bonus accrued will also be tax exempted and finally the claim value (maturity or death) will also be non-taxable. Fixed Deposits are not entitled for tax rebates (except special irrevocable FDs having a lock in period of 5 years). If the total annual interest earned is greater than Rs.10,000, then interest earnings become taxable. On maturity the returns also add up to income and hence become taxable.
