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Life insurance versus PPF – What should you pick?

Life Insurance and Public Provident Fund (PPF) have different features that help you secure the future of yourself and your loved ones, including your children’s higher education and career plans, marriage or retirement plans. While PPF ensures you have savings for your future, life insurance includes protection against death and other risks. In this article, we will learn more about Life insurance and PPF and their similarities and differences.

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What is a PPF?

The full form of PPF is the Public Provident Fund. It is a long-term debt scheme introduced by India's government. Here, an individual makes periodic payments to the PPF account and receives a lump sum post-maturity. The current interest rate for PPF is 8% p.a. One can deposit any amount between Rs 500 and Rs 1.5 lakhs per annum in their PPF account, and this contribution is eligible for a tax rebate under the Income Tax Act’s Section 80C.

Many individuals use PPF as a savings instrument to create a retirement fund, benefiting from its guaranteed, risk-free returns and full capital protection. Given that the Central Government determines the returns, some investors also employ PPFs as a means of diversifying their portfolios.

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What is Life Insurance? 

Life insurance is an agreement between the policyholder and the insurer where the life assured is offered life coverage against the uncertainties in the form of a sum assured amount.

In simple words, under Life Insurance, an individual makes regular payments to avail of the risk cover disbursed in the event of the policy’s maturity or the policyholder’s death. The amount stays fixed for the opted policy tenure. LI premium payments also qualify for a tax rebate. Based on your financial coverage needs, you can also buy different types of life insurance plans with Policybazaar. 

How are Life Insurance (LI) Vs Public Provident Fund(PPF) Alike?

Below mentioned are some of the similarities between Life Insurance and PPF:

Partial Withdrawals: In a PPF account, you can make partial withdrawals, up to a fixed limit, from your account balance. This feature becomes accessible seven years after the initiation of your PPF account. 

With a ULIP life policy, partial withdrawals can be made following the completion of the five-year lock-in period, which is associated with the funds invested.

Maturity Benefits: Both plans provide maturity benefits when they mature. PPFs offer maturity benefits as a lump sum upon policy maturity, including the total deposits and the annual compounded interest over the 15-year period. 

Life insurance policies offer a Return of Premium (ROP) benefit and provide a maturity benefit in the form of a return payment equivalent to the premiums paid during the policy term.

Regular payments: Both life insurance in India and PPFs necessitate consistent payments or deposits at specified intervals. In the case of a PPF, a minimum annual deposit of ₹500 is required, while for a life policy, the premium amount and tenure are determined by your insurer.

Tax exemption: Contributions made towards LI premiums and PPF are both exempt from tax under Section 80C. Further, the death benefit or maturity amount under LI, and the interest earned and maturity amount under PPF are both tax-free.

Loan facility: PPFs allow account holders to take loans from the third year until the end of the seventh year. Conversely, traditional life insurance policies such as endowment plans permit loans after completing a three-year lock-in period.

For PPFs, a loan of up to 60% of the account's credit balance can be availed. In the case of life insurance in India, the loan amount depends on the surrender value and policy type. It may range from 80% to 90% of the surrender value for traditional life or endowment plans.

Revival: Both LI and PPF can be revived even if you stop investing and paying the premiums, respectively. In LI, you can choose the policy period, which will be subject to certain restrictions that vary between different policies. It can even be until death.

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PPF vs Life Insurance - The Differences

Parameters  PPF  Life Insurance 
Type of Product  Investment  Insurance 
Regulating Authority  The Indian Government  IRDAI (Insurance Regulatory and Development Authority of India)
Eligibility  Indian citizens  Indian citizens, employers and NRIs 
Returns  Returns are fixed by the Indian Government and reviewed periodically. 7.1% is the current rate of interest (ROI).  These plans offer a death benefit in case of the policyholder’s death and give maturity benefit in case of outliving the policy term. 
Frequency of Investment  Fixed income investment. One deposit is needed in a year.  Premium paid on a regular basis or as a lump sum payment 
Facility to Open  Post offices or Banks  IRDAI approved insurers, both online and offline or agents

Why Should You Choose Life Insurance Over PPF?

By now you must have a clear picture of how Life Insurance and PF are alike. Let’s further understand what are the advantages of buying Life Insurance Over PPF.

Protection: The most significant reason to opt for a Life Insurance product is protection. LI guarantees payouts in unfortunate events like illness, death, or any other situation against which the policy has been bought.

For example, even if a policyholder pays only one year’s premium and then passes away, the LI policy will pay the entire sum assured or coverage opted for. Contrarily, in the case of a PPF account, only the amount contributed towards the PPF along with the applicable interest would be paid. Therefore, in life insurance, you can choose a life cover that is about 20 times more than your annual income and therefore, ensure that your loved ones/nominees will receive that amount after you pass away.

As a result, the amount paid by the insurer could be a lot more than the premium paid in a Life Insurance policy, primarily because protection is the chief objective of the plan. However, under PPF, the account holder’s nominee only gets the total of the deposited amount along with accumulated interest at the prevailing interest rate.

Tenure: While PPF is a long-term investment plan (minimum 15 years) and cannot be taken for a shorter period, LI can be taken for a shorter duration, starting at five years. LI therefore offers greater flexibility.
Number of policies/accounts: There are no restrictions on the number of life insurance policies an individual can take. However, only one PPF account per person is allowed.
Liquidity: PPF is not as liquid as LI - an LI policy can be surrendered and the money withdrawn in an emergency.

PPF withdrawals are permitted annually, after the seventh financial year from the year the account was opened. Additionally, the withdrawal amount is subject to restrictions. Further, the PPF account can neither be closed nor the entire amount be withdrawn before the completion of 15 years. Also, loan facility can be availed only after the third financial year, counting from the year of opening the PPF account.

In a life insurance policy, the minimum lock-in period is three years, after which the policy can be encashed – in other words, the policy acquires a surrender value. One can also take a loan or cash value after the policy’s lock-in period is complete.

Financial instrument: A life insurance policy is comparable to a property with a legal status. The right to this property can be transferred, gifted, hypothecated, mortgaged, or even sold as per applicable laws.

Loan: One can take a loan on a life insurance policy. The cash value of the policy can be used as collateral to borrow money, for instance, car loan, personal loan, etc.

You need to assign the policy to whichever financial institution/bank is giving the loan, following which, you can avail overdraft facilities from that financial institution/bank. The overdraft amount is usually within the surrender value, which of course, keeps increasing with every premium paid.

Interestingly, a life insurance policy can be assigned to take a housing loan too. However, the loan amount is not limited to the surrender value of the policy, but equals the death or maturity claim value of the policy.

On the contrary, PPF cannot be used as collateral or hypothecated, because it cannot be attached by a decree of court or by creditors.

Wrapping It Up!

Both LI and PF are important financial instruments. After analysing your specific financial requirements, responsibilities, and urgency, and weighing all the pros and cons, you can opt for either.

Your financial planning should be rooted in protection and saving – protection first, saving next.

FAQs

  • Q: Which is a better choice, PPF or life insurance?

    Ans: LI and PPF are both long-term savings instruments. The term/period under LI spans from a minimum of five years to a maximum of 30 years, and it can sometimes extend until death. In the case of PPF, the initial duration is 15 years, after which it can be extended in five-year intervals.
  • Q: When should I start investing in PPF?

    Ans: There is no minimum age to start a PPF account. Adults and kids alike can open a PPF account. However, in the event of children under the age of 18, the account should be maintained on their behalf by a guardian until they reach the age of 18.
  • Q: Which is better, LI or PPF?

    Ans: The PPF programme allows you to build up an assured corpus that is also tax-efficient. LI, on the other hand, assists you in providing financial security to your family in the event of your untimely death. As a result, the justification for purchasing both schemes is distinct.

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