Difference between Fixed Deposit vs Life insurance

3 min read Mar 27, 2024

When it comes to saving money and planning for the future, understanding the best investment options available to you is key. Two popular choices among savers are Fixed Deposits (FD) and Life Insurance. Both offer distinct benefits and can be crucial components of a well-rounded financial plan. But when it comes to FD vs Life Insurance, which one should you choose? Breaking down the distinctions between FD and Life Insurance, this guide assists you in making an informed decision that aligns with your financial goals.

Difference between Fixed Deposit and Life Insurance

The primary difference between Fixed Deposit and Life Insurance lies in their core objectives and benefits.

An FD is a savings instrument focused on capital preservation and earning guaranteed interest over a specified period, making it ideal for short-term financial goals.

On the other hand, Life Insurance is designed to provide financial protection to your loved ones in the event of your untimely demise. It offers a death benefit along with potential savings and maturity benefits for long-term planning.

Let's delve into the key points to compare these two options further.

Tenure

• FD: Typically ranges from 7 days to 10 years, offering a lot of flexibility to match your liquidity needs and financial planning.
• Life Insurance: Offers long-term coverage, up to 100 years, securing the financial future of the policyholder's family for generations.

Investment

• FD: You can start with as little as ₹1000, with no upper limit, making it accessible to both small and large investors.
• Life Insurance: Various factors determine premiums but ensure life cover and may include savings components, addressing more than just investment needs.

Returns

• FD: Returns are pre-determined and not affected by market volatility, providing a stable and predictable growth of your savings.
• Life Insurance: The returns on certain LIC policies might exceed those of FDs, especially with plans that offer bonuses and other benefits, albeit with a higher risk profile.

Taxation

• FD: Interest earned from FDs is subject to taxation according to the Income Tax Act. It is added to the individual's total income and taxed according to the applicable slab rates. However, investing in a 5-year tax-saving FD qualifies for a tax deduction under Section 80C of the Income Tax Act, with a maximum limit of ₹1.5 lakh in a financial year.
• Life Insurance: Premiums paid towards Life Insurance policies are eligible for tax deduction under Section 80C of the Indian Income Tax Act, up to a maximum of ₹1.5 lakh annually. Moreover, the death benefit received by the nominees or the maturity benefit is usually exempt from tax under Section 10(10D) of the Act, provided the premium does not exceed 10% of the sum assured for policies issued after 1st April 2012.

Withdrawal

• FD: Allows for premature withdrawal, which can be both a flexible feature and a downside if done too early due to potential penalties.
• Life Insurance: Typically involves a lock-in period, after which the policyholder can surrender the policy if necessary, though this action may incur costs and result in loss of benefits.

Which is better: Fixed Deposit or Life Insurance?

The choice between Fixed Deposit and Life Insurance depends on your individual financial situation, goals, and risk tolerance.

If your primary aim is to save for a short to medium-term goal with guaranteed returns, an FD might be the better option. However, if you're looking for long-term financial planning that focuses on providing financial security to your loved ones in your absence, a Life Insurance policy could be more beneficial.

Axis Bank partners with esteemed insurance providers such as Max Life Insurance, Life Insurance Corporation Of India, Bajaj Allianz Life Insurance, and Tata AIA Life Insurance, thereby offering a diversified portfolio of Life Insurance solutions. These partnerships aim to address individual financial protection needs at every life stage, combining savings and security to ensure you can select a plan that aligns perfectly with your financial goals.

Also Read: [Benefits of opening an FD without a Savings or Current Account]

Conclusion

In your journey of choosing the right option in the FD vs Life Insurance debate, think about what you really want from your money. If you like to play it safe and want to know exactly how much you'll get back, then an FD is a straightforward choice for you. But, if making sure your family is financially secure even when you're not around is your top priority, and you're okay with waiting a bit longer for possibly better returns, then Life Insurance might be the way to go.

The comparison between Fixed Deposit and Life Insurance is really about what best fits your life and financial dreams. Keep it simple, think about what you need, and the choice will become clear.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.