FD vs Life Insurance Plans

Updated on 24 Oct, 2023

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Among the different financial products available in India, fixed deposit (FD) and life insurance plans are the most popular investment products. Even though a life insurance plan is an insurance product, it is perceived as an investment product for many individuals. At the same time, a fixed deposit is a pure investment product. This article will cover the difference between FD vs Life Insurance Plans.

Difference Between Fixed Deposit (FD) and Life Insurance Plans

Particulars	Fixed Deposit	Life Insurance Plans
Meaning	Banks, post offices and NBFCs offer fixed deposits where you have to invest a particular portion of money for a specific tenure. You will receive fixed interest on your investment. Upon maturity, you will receive the principal and interest amount.	A life insurance plan is an insurance product that provides financial security to the insured’s family in the event of the policyholder’s untimely death. Some life insurance products offer multiple investment options like money back plans and endowment plans. Endowment plans provide a lump sum benefit on maturity, whereas money back plans provide regular income and death benefits. Moreover, a traditional life insurance plan provides fixed payouts along with an additional bonus. However, please note that a term insurance plan is almost always a better choice for your insurance needs.
Tenure	The tenure of fixed deposits ranges from 7 days to 10 years which can be suitable for short term and long term investment purposes.	Life insurance plans offer life coverage and guaranteed returns for a longer-term period until the age of 99 of an investor. In other words, the tenure can be extended up to a lifetime. However, the only limit is that the investor shall be 18 years of age.
Investment	The minimum amount to start investing in a fixed deposit is Rs.1000. Also, there is no limit on the maximum investment. However, depending on your investment amount, the bank will calculate the interest on a quarterly basis.	The premium for a life insurance plan varies depending on the type of policy and other factors like the policyholder’s age, policy value, insured’s health condition, etc. Also, in a monthly income plan and guaranteed plan, you will receive investment returns as maturity benefits after completion of the policy tenure.
Returns	The returns on the fixed deposit are guaranteed and decided at the time of opening an FD account.	A monthly income plan is a type of life insurance policy that offers guaranteed and regular income to help you meet your monthly expenses and achieve your short term financial goals. Also, investment in savings plans such as guaranteed returns policy offers assured returns to investors.
Withdrawal	Fixed deposit schemes provide an option of partial withdrawal. However, breaking an FD before maturity affects the interest rate of investment. Also, some banks levy penalties on withdrawal before the maturity period.	Life insurance plans allow withdrawal after the three year lock-in period of the policy.
Taxation	Investment in FDs does not provide any benefit. However, only investment in a five-year tax savings FD allows tax deduction under Section 80C of the Income Tax Act, 1961.	The life insurance premiums are eligible for tax deduction under Section 80C. Also, tax deductions are available under Section 10(10D) where the maturity amount from a life insurance policy is fully exempt from tax u/s 10 (10D) provided the premium amount doesn’t exceed 10% of the sum assured. However, in case the premium is above 10% of the assured amount, then the amount that the policyholder receives at the end of the tenure is fully taxable. Moreover, the income part of the maturity amount of policies not covered under Section 10 (10D) is subject to a TDS of 5%. However, TDS is deductible only if the maturity amount of a life insurance policy exceeds INR 1,00,000.

Which is Better Investment – FD or Life Insurance Plans?

Both fixed deposit and life insurance plan have their own purpose of investment. An FD is a pure investment product that helps you create a savings habit and save for your future. On the other hand, a life insurance plan is an insurance product that helps you provide financial security to deal with any unforeseen life events.

Fixed deposits are suitable for both short term and long term investments, while life insurance plans are suitable for long term investment purposes. Also, you can invest in a fixed deposit for a period as low as 7 days, unlike life insurance plans where you have to invest for at least 5 to 10 years, depending on the type of policy. Furthermore, the minimum amount you can invest in FD is Rs. 1000, while the premium for life insurance varies based on the individual’s age, gender, term, health condition, etc.

In the case of fixed deposits, the returns are known at the time of opening the FD account. However, Unit Linked Insurance Plans (ULIPs) are subject to market risks. Therefore, the fund value you will receive from this plan depends on the prevailing market conditions.

Therefore, depending on your requirement, the fixed deposit can be an ideal investment option if you want to accumulate wealth and earn fixed returns from your investment. Also, fixed deposits are for your saving needs, and a life insurance plan is to relieve your family from the financial risks in case of your unexpected absence. Hence, you can consider a term insurance plan to cover your insurance needs.

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