Comparison Between Life Insurance And PPF Account?

PPF or Public Provident Fund is a government-guaranteed savings scheme. The returns are fixed but set by the government every quarter. You can open a PPF account with the post office or most major banks. 

Life Insurance plans, on the other hand, are pure protection plans which provide life assured and his family with financial coverage in case the life assured meets an unfortunate event. On purchasing a life insurance plan the life assured gets the life coverage or the sum assured in case the life assured dies while the policy is still active. 

Below here is a comparative study between PPF and life insurance

Comparative Study Between Life Insurance And PPF 

Let us compare the two instruments on multiple investment criteria:

1. 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.

2. Yield

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.

3. Flexibility Offered By The Investment Instrument

In PPF, investors 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.

4. Liquidity

In PPF, withdrawal is permissible every year from the 7th financial year to the year of opening the account. Amount of withdrawal is subject to restrictions and the account cannot be closed nor can the full amount be withdrawn before completion of 15 years. Loan facility is available after the 3rd financial year from the 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.

5. 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. PPF cannot be hypothecated or used as collateral as it cannot be attached by creditors or a decree of court

6. Tax Saving

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 claims 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.

7. 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.

8. 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.

9. 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.

Take Away

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.

You may also like to read - How Much Life Cover Should You Buy?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.