Some people compare life insurance with other saving instruments such as PPF as both can be saving avenues as well as allow one to reduce one's tax outgo. However, strictly speaking PPF and life insurance are actually two very different instruments with few features in common. Sound financial planning rests on the twin pillars of protection and savings. Protection always comes first because once you are fully insured even if something unfortunate happens to you, your family will be able to maintain its standard of living without any trouble. Only after ensuring financial protection can you think about saving for other goals such as your child's education, his/her marriage, your retirement etc.
Public Provident Fund (PPF) is an investor and tax-saver's favorite long-term debt scheme which is under the aegis of the government. A minimum of Rs.500 and a maximum of Rs 1.50 lakh can be deposited in a PPF account in a single financial year. This deposit amount is also deductible from taxable income under section 80C of the Income Tax Act. As PPF is an EEE scheme, contribution, interest and maturity amount, all three are tax free.
Life Insurance requires premium to be paid at regular intervals to avail the protection or risk cover. The amount of risk cover provided by a policy is called the sum assured under the policy. This sum assured is paid on the event of death or maturity depending on the type of life insurance purchased i.e. whether it is a plain term plan or a term plus savings plan. Premium paid for a life insurance policy also gets you tax benefits under section 80C. It is also an EEE scheme subject to certain conditions.
How to compare
The best way to compare both will be to examine as to how far each meets the criteria by which customers judge investment options. However, for comparison purposes we shall consider only life insurance policies with a savings component as only this type can be looked upon as a savings instrument and therefore be comparative to PPF.
What do customers look for when selecting an investment instrument? No instrument will have all the features required. Some are mutually exclusive. Compromise and balancing based on needs, investment goals, risk bearing ability, time constraint etc. will be the deciding factors.
Let us compare the two instruments on multiple investment criteria:
Safety & legality
Both PPF and life insurance are legal avenues for investment and are considered fairly safe. PPF is a central government scheme and life insurance in India is offered by the government-owned Life Insurance Corporation (LIC) and by private sector insurance companies which are regulated by the IRDAI set up by the government.
The yield in PPF is currently 8.7% per annum compounded yearly but is subject to change by the government. In life insurance the yield on maturity benefit varies from insurer to insurer and also from one policy to another. Typically, the yield on maturity benefit may be around 4% to 6% but it is not possible to predict a "yield" for death benefit as it may be several times the premium paid (or invested amount) depending upon the time of death from the start date of the policy.
Flexibility offered by the investment instrument
In PPF, investor can choose to invest any amount between a minimum of Rs 500 and a maximum of Rs 1.50 lakh per financial year. This amount can be invested lump sum or in 12 installments within the year. In life insurance the contribution (one time/ annual/half yearly/quarterly/monthly) called premium is fixed and not flexible. Buyer can choose the sum assured and accordingly the premium payable at the time of buying the policy as per his requirements and capacity to pay. However, once the policy is bought the premium to be paid cannot be varied. In most policies there is no maximum limit fixed, subject to certain conditions, for the sum assured that can be bought.
Both PPF and life insurance schemes can be easily revived in case you stop investing/paying premiums due to some problems. PPF tenure is 15 years which can be repeatedly extended for a block of 5 years up to 25 years. In life insurance the policy period can be chosen by you, subject to certain restrictions/ceilings which vary from policy to policy. It can be even till death. Any number of policies can be taken by a person but only one PFF account is allowed per person
In PPF, withdrawal is permissible every year from 7th financial year from the year of opening account. Amount of withdrawal is subject to restrictions and the account cannot be closed nor can full amount be withdrawn before completion of 15 years. Loan facility is available after 3rd financial year from year of opening of the PPF account. Generally, in a life insurance policy the minimum lock-in period after which the policy can be encashed (i.e. acquires a surrender value) is 3 years. You can take loan/cash value after the lock in period of the policy.
Use as a financial instrument
A life insurance policy is a "property" with legal status. The right to this property can be transferred, mortgaged, hypothecated, gifted or sold in accordance with the law applicable for these processes.
This status of a life insurance policy offers a variety of living benefits:
You can take loan on the policy from the insurer. The policy's cash value can be used as collateral for borrowing money from other sources as well e.g. personal loan, car loan etc. For all these you have to assign the policy to the bank or the institution that gives the loan. You can avail over draft facilities from your bank by assigning the policy. The overdraft amount would normally be within the surrender value, which, however, goes on increasing with every payment of the premium. The policy can also be assigned to take a housing loan. Here the loan amount is not limited to surrender value but is equal to the death or maturity claim value of the policy.
PPF cannot be hypothecated or used as collateral as it cannot be attached by creditors or a decree of court
Investments in both get Section 80C rebate as per the Income Tax Act up to a maximum of Rs 1.50 lakh (this limit is of course, inclusive of other permitted savings avenues under Section 80C). The yield is tax-free in PPF. Life insurance maturity claim will be treated as taxable income only if the premium paid per annum is more than 10% of the sum insured. Otherwise, it is also tax free. Death benefit is totally tax free.
Convenience / Freedom from care
PPF can be opened in post offices or designated banks. Investment in the PPF account has to be made periodically. No reminders/notices are sent. However, insurance companies send you reminders through the agent and via post/SMS. For both you can nominate someone to receive the amount in case of your death.
Compulsion to maintain the investment
There is no compulsion under both. In PPF if you stop contributions at any time you can still draw at the end of 15 years. In case you wish to re-start contributions to your PPF account after a gap of some years you can do so subject to certain conditions. In case of an insurance policy, if premiums have been paid for a pre-specified minimum number of years (typically three years) initially then the policy acquires a paid-up status or paid-up value. Once this happens, you can surrender the policy and get some refund although at a loss. Alternatively you can let the paid up policy continue as such (with proportionately reduced sum assured) without contribution of further premiums. However, if you stop paying premiums within the initial three (or the number specified in the policy) years of the policy tenure then the policy totally lapses and nothing is payable.
However, the insurer will repeatedly remind you to continue the scheme. Life insurance policies can be revived subject to certain conditions and payment of overdue premiums with interest and other charges.
Attachment by creditors
PPF amount cannot be attached by creditors. Generally, life insurance policies can be attached. However, it is possible to take a policy under the Married Women's Property (MWP) Act which cannot be attached by creditors.
What if Death intervenes?
In PPF, whatever is saved till death will be paid to the nominee with interest. In life insurance the sum assured (the amount insured for), with Accident Benefit if applicable, will be paid to the nominee, irrespective of the number of premiums actually paid.
An example will bring out why the life risk element is the primary need in financial planning i.e. protection first, savings next: A person, aged 30 with good taxable income, wants to create a corpus for use after 15 years for the wedding of his daughter who is now 5 years old. He has no insurance. He plans to deposit Rs 1,00,000 every year for 15 years in PPF expecting to get Rs 31,17,278 at the end of 15 years and this would be tax free.
If he takes an endowment policy for 15 years with Accident Benefit and pays about Rs 1,00,000 per year he can get an insurance cover of approximately Rs 15,00,000 with bonus taking LIC's current endowment plan as an example. Assuming a bonus rate of 38 per 1000, at end of 15 years he will get tax-free maturity proceeds of about Rs 23,55,000.
Now if this young man dies just after 3 years, let us say while driving his car, from PPF the family will get Rs 3,55,294 only. From the life insurance policy, the family will get basic sum assured of Rs. 15,00,000 plus bonus of Rs. 1,71,000 for three years plus accident benefit of Rs 15,00,000 totaling Rs 31,71,000. Even if the death is not due to an accident and the accident benefit is not available, the family would still get Rs 16,71,000 tax free.
It is to be noted that in case of life insurance an estate (here the provision for marriage) was created the moment he took a policy and he pays for the estate over 15 years or as long as he lives.
In the case of PPF he has to pay for 15 years i.e. create and then get the corpus as the estate is ready only after the last payment. If death intervenes he will only get whatever he paid with interest.
Investors are advised to check the yield offered by both instruments and do their own calculation and comparisons when deciding to invest. However, the point being made here is that in life insurance you create and save. In all other forms of savings you save and create, provided you live to complete the scheme.
Protection first, savings next is the best advice. Your planning should rest on two pillars, protection and saving.
The author is Rtd. Executive Director, Life Insurance Corporation of India
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