Life insurance versus PPF – What should you pick?

PPF is a long-term debt scheme introduced by the Government of India. 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-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.

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Under LI, an individual makes regular payments to avail 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.

How LI and PPF are Alike:

Regular payments: LI and PPF both involve payments at regular intervals directed towards savings.

Term: LI and PPF are both long-term saving financial instruments. Under LI, the term ranges from a minimum of five years to a maximum of 30 years, and this sometimes continues until death. In case of PPF, the initial term is a 15- year period, following which, it can be repeatedly extended in five-year blocks.

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.

Loans: For both LI and PPF, loans can be taken subject to certain terms and conditions. Not all LI products offer loan facilities, which to some extent, also depends on the surrender value of the LI policy. In case of PPF, 60% of the account’s credit balance can be taken as a loan.

Lock-in: Both LI and PPF have an initial lock-in period of five years during which withdrawals cannot be made.

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 ceilings/restrictions that vary between different policies. It can even be until death.

By now you must have a clear picture of how LI and PF are alike.

The Advantages of Life Insurance Over PPF:

Protection: The most significant reason to opt for a Life Insurance product is protection. LI guarantees payouts in the event that contingencies like illness, death, or any other event against which the policy has been taken occur.

For instance, 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 case of a PPF account, only the amount contributed towards the PPF along with the applicable interest would be paid.

Therefore, 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 plans (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 PFF 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 courtor by creditors.

Concluding

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.

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