Difference Between Fixed Deposit and Life Insurance

Posted on Thursday, October 17th, 2024 | By IndusInd Bank

Two popular options often come to mind when planning for a secure financial future: life insurance and fixed deposits (FDs). While both serve to protect your finances, they have distinct purposes, advantages, and features. Knowing these differences is crucial. It will help you make an informed decision that matches your financial goals.

In this blog, we will explore the key differences between fixed deposit vs life insurance while addressing the concern of selecting the right financial product.

Fixed Deposit (FD)

• Type of Investment: Banks and other financial institutions offer fixed deposits. They are low-risk because they offer a fixed interest rate for a set period.
• Returns: Interest earned on the principal amount is how FDs earn returns. The fixed interest rate ensures predictable and guaranteed returns at the time of investment.
• Tenure: FDs have a set tenure, but you can adjust it to a length that best fits your financial objectives. FD tenures can vary from seven days to ten years.
• Liquidity: FDs are not as liquid as other investments despite offering safety and predictability. Penalties and lower interest rates may follow premature withdrawals.
• Taxation: Your income tax slab determines the tax rate that applies to interest earned from FDs. Other than tax-saver fixed deposits, no tax advantages are connected to FDs.

Also read: Understanding the Basics of Fixed Deposits

Life Insurance

• Type of Investment: Life insurance’s primary purpose is to protect your family financially in the event of the death of the policyholder. It is a financial safety net that provides beneficiaries with a lump-sum payout, which provides financial security.
• Returns: Depending on the type of policy, life insurance returns take the form of a maturity benefit or a death benefit. There might also be a savings component that builds up over time in money-back or endowment policies.
• Tenure: Life insurance policies usually have long terms. Some may last the insured person’s whole life.
• Liquidity: Life insurance policies offer some liquidity. This is mainly if they include a cash value that can be surrendered or used as a loan.
• Taxation: Under Section 10(10D) of the Income Tax Act, the death benefit is tax-free. Premiums paid for life insurance policies are deductible from taxes under Section 80C.

Important Differences

Investment Nature: Life insurance protects against risk and provides financial security. In contrast, fixed-rate deposits (FDs) are investments with fixed interest rates.

Returns: FDs offer interest on the principal amount while life insurance pays out in the event of the policy’s maturity or the insured’s death.

Goal: Life insurance provides a financial safety net for your family and dependents. FDs are for wealth growth and preservation.

Tenure: FDs have a flexible tenure. Life insurance policies have longer terms and, sometimes, offer lifetime coverage.

Taxation: FDs do not offer special tax advantages, except tax-saver FDs. Also, the interest on FDs is taxable. Conversely, life insurance provides tax advantages on paid premiums and tax-free death benefit payouts.

Which is Preferable, Life Insurance or Fixed Deposits?

Your unique finances, goals, and risk tolerance will all influence your decision. It’s about life insurance or a fixed deposit.

Consider your financial goals when deciding which side of the FD vs. life insurance debate to support. An IndusInd Bank Fixed Deposit is an obvious choice if you prefer to be cautious and want to know precisely how much you’ll get back. However, if ensuring your family’s financial security even after you pass away is your priority, purchasing life insurance might be the best action.

The key consideration when comparing FD vs life insurance is what best suits your financial goals and way of life. Keep things straightforward, consider your needs, and the decision will become obvious.

Ready to secure your financial future with a fixed deposit account? Discover the benefits and start growing your savings today. Open your IndusInd Bank Fixed Deposit account now and enjoy peace of mind with guaranteed returns!

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.