The saving needs of each and every individual are unique. Most individuals do not make wise decisions in terms of investments as they will often invest in certain products without fully evaluating the product features and their own financial needs. With the numerous investment options available, choosing the most suitable product becomes all the more confusing. Thus, one needs to do a proper evaluation and then choose a product according to his requirements and not base their decisions on random suggestions.
Insurance is one of the most important investment avenues for security reasons. However, today, most individuals consider insurance to be just another investment option overlooking its protection feature. As such, comparison of insurance products against other saving products often arises.
I have often come across a question of whether a Life Insurance Product is better vis-à-vis a PPF. This question has intrigued me as the 2 products are widely different but at the same time I feel the need to answer it since the question has risen.
Public Provident Fund (or PPF in short) is a Long Term Debt Scheme which had been introduced by the Government of India. Under PPF, an individual makes periodical payments into his PPF account and get a lump sum amount after maturity. The interest rate of a PPF is 8.8% p.a. compounded yearly from April 1, 2012. There is no compulsion on the amount of contribution required every year in a PPF Account. One can deposit any amount from Rs 500 to Rs 1 lakh per annum for which he would get a tax rebate under section 80C and can vary the amount each year.
Under life insurance (LI in short), an individual makes small regular payments to avail the risk cover (called SA) which is paid in case of death or maturity. Life Insurance also provides a Tax Rebate for the premium payment towards the same but the contribution amount is fixed for the policy tenure opted.
Though both LI and PPF involve regular payments towards savings and have certain similar features, they are very different from each other. So, it would be prudent to study their respective drawbacks and benefits over each other. First let’s highlight the similar features.
- A) Both LI and PPF are long-term saving instruments. The term under LI ranges from minimum 5 years to maximum 30 years which sometimes even continues till death. The term under PPF is for a period of 15 years and can be increased in 5 year blocks.
- B) The contribution under LI and PPF are exempted under section 80C of the Income Tax Act up to a maximum limit of 1 Lakh. Moreover, the maturity amount or death benefit under LI and the maturity amount and interest earned under PPF are also exempted from tax.
- C) Loans are possible from both PPF and LI subject to terms and conditions. Not all LI Products have Loan facilities and it also depends on the Surrender Value. However in a PPF Account, 60% of the credit balance of the PPF can be availed as a loan.
- D) There is a Lock-In Period of 5 years in both PPF and LI during which there is no withdrawal possible.
These are the basic and the most common similarities of PPF and LI. Now there are some differences as well between the two.
PPF OVER LI:
LI OVER PPF:
- A) Minimum investment under PPF is as low as Rs. 500 and there is no fixed amount. Any amount from Rs 500 to Rs 1,00,000 can be paid towards the PPF Account. However, in a LI Policy, the premium payment is more or less fixed for the entire tenure opted for thus making it a rigid contribution with lesser flexibility.
- B) Returns are always guaranteed @8.8% with no capital risk in a PPF whereas all LI Products do not guarantee returns. Some policies like Endowment Policies guarantee returns while others like Unit Linked Insurance Plans do not. There are some plans which do not have any maturity benefit at all.
- C) Partial withdrawal is allowed after the end of the 4th Financial Year in a PPF whereas not all LI Policies offer facilities of Partial Withdrawal. Some plans like Unit Linked Plans do but most Traditional Policies do not.
- A) The first and foremost reason of choosing a LI product is protection. Insurance guarantees money in the event of any contingencies (death or illness) or any other event against which the policy has been taken. For example, if you have paid only 1 year’s premium and then meet with death, then in a LI Policy, the entire amount of Sum Assured or the coverage opted for is paid. However, in the same example, only the amount contributed towards the PPF along with interest would be paid in a PPF Account. Thus, the amount paid by the insurer may be much more than the premium paid in a LI Policy since protection is a primary objective of the plan. However, under PPF this feature is non-existent and the nominee of the accountholder gets only the total of the amount deposited with interest accumulated @8.8%.
- B) PPF is a long term investment (15 years) and cannot be taken for a shorter period while LI can be for a shorter duration (starting at 5 years).
- C) Also PPF is not as liquid as LI because LI Policy can be surrendered and the money can be withdrawn in case of an emergency. However, in PPF only investment made in Year 1 only in Year 7 can be withdrawn in case of an emergency.
Thus, both are important financial instruments and can be opted for under different requirements but only after carefully weighing the pros and cons of the same and analyzing your own financial needs and responsibilities without investing blindly as per the trend of the market or advices based on other’s needs and wants.
The author is CEO of MyInsuranceClub.com and can be reach at firstname.lastname@example.org