People invest their money in the best investment options so that they derive benefit from the interest generated in the long- or short-term. This is easier said than done, as there are endless options available to an investor that offer superior returns with low-risk exposure.
Investments are made with a view to achieving different goals. They are sometimes made with a view to saving for a rainy day or as a means to protect their assets from untoward incidents. The best investment plans always have protection and savings taken care of. But, most people tend to mix up the two, when they are very different from each other.
To shed some light on the matter and to clearly understand the two, we will first understand what they are, and then compare them to find out how they stack up in different investment criterion.
What is life insurance?
Life is a protection plan that offers risk cover in exchange for periodic payments known as ‘premium’. The risk coverage is provided in the form of an amount called ‘sum assured’. This amount is stated by the insured and is paid out either on death of the insured to the nominee or at the time of policy maturity. Life insurance are among the best investments and can also be used for tax planning under Section 80C. And, they also fall in the EEE category if they meet certain conditions.
What is PPF?
PPF or Public Provident Fund is among the most popular long-term debt schemes run by the government. Under this scheme, a maximum of Rs.1.50 lakh or a minimum of Rs.500 can be deposited in a financial year. PPF, being an EEE scheme, ensures that the contribution, interest and maturity amounts are not liable to tax. It is also similar to life insurance in the tax aspect as the amount deposited here is deducted from taxable income under Section 80C as well.
How flexible are they?
When it comes to PPF, an individual can choose to invest a maximum of Rs.1.5 lakh in a financial year or a minimum of Rs.500. This need not be paid in a fixed way. The investment can be made as a lump sum or in 12 installments. The tenure for the PPF is of 15 years, but it can be extended till 25 years, making it the best investment plan with guaranteed returns.
In life insurance, the premium has to be paid to keep availing benefits from the service. The premium payment can be done monthly, quarterly, half yearly or annually. The amount to be paid as premium is influenced by the sum assured opted for by the individual. The amount and frequency of premium payment is fixed before the start of the policy and cannot be altered later on. There is no cap on the sum assured or the policy tenure for life insurance.
Are they legal?
PPF and life insurance, both these investment plans are legal in nature and are considered as safe money investment plans. As mentioned earlier, PPF is a scheme that is offered by the central government. Whereas, life insurance is offered by state-owned insurers such as Life Insurance Corporation (LIC) or private entities like Bajaj Allianz Life Insurance.
PPFs are known to give great returns on the amount invested, and are among the best saving plan. For the October-December quarter of 2017-18, the government fixed the interest rate at 7.8 percent per annum. The invested amount is compounded yearly, but can be changed by the government.
Life insurance plans come with a maturity benefit, which traditionally has been in the region of 4-6%. The interest rate varies from one insurer to another. As far as the death benefit is concerned, it is very hard to gauge the return on it as it depends on the amount of the premium paid and the duration of the policy.
So, which among these is the best investment plan? We can’t say for sure as it all depends on the need and the purpose of the individual investing the amount. Insurance plans are for protection, whereas PPFs are saving avenues reserved mostly for meeting expenses expected in the long term.