There
are many financial and insurance products available within the
financial market
that offer investment opportunities and
receive higher returns on your investments. Among the products
available within the market, fixed deposit (FD)
and life Insurance
are among the foremost
popularly used investment products. Though
life insurance is an insurance product, many use life insurance as an
investment product. On the
contrary, a fixed deposit may
be a pure investment
product wherein you'll invest for varying tenures. Nonetheless,
both life insurance and fixed deposits serve your different
needs.
About Fixed Deposit
Fixed deposits are investment products. You can invest in fixed deposits for fixed tenures as per your convenience and obtain attractively returns on your investments at maturity. Normally, banks don’t allow you to withdraw your deposits before a given maturity. But, with prior notification to a bank, you'll withdraw your fixed deposits.
Benefits of Investing in Fixed Deposits
Fixed deposits are savings products offered by banks and you can enjoy lots of advantages by investing in them. Mentioned below are the varieties of benefits you'll enjoy by investing in fixed deposits:
Fixed deposits foster savings habits.
It provides you higher interest rates on your savings compared to the the interest you receive in general/normal savings accounts.
You will get promised returns on your investments provided that you don’t withdraw them prematurely.
Just in case your income crumbles, you'll have an option to withdraw your fixed deposits to satisfy your emergency financial needs.
Fixed deposits enable you to select your interest payment options. You’ll receive it either at maturity or annually or monthly supported the term you chose.
FD comes with flexible investment tenures. You can choose your investment tenures at per your convenience that normally ranges from 3 months to 10 years in Nepal.
You'll even have a chance to invest in multiple fixed deposit accounts provided that you've got different goals of investments.
Types of Fixed Deposit Accounts
There are several types of fixed deposit accounts, ranging from short-term fixed deposits to long-term fixed deposits. Identifying your financial goals can assist you to make the proper decision when it involves choosing your fixed deposit tenure, as all of them have different advantages.
Short-Term Fixed Deposits: These are the fixed deposit accounts that ranging between 3-6 months. However, the interest offered in such Fixed deposits are less than the interest on long-term deposits.
Long-Term Fixed Deposits: Long-term fixed deposit accounts allow you to hold money for 2-3+ years. If you are looking to save lots of money for an extended period of your time and earn higher interest, long-term fixed deposits could also be more suitable for you.
About Life Insurance
Life insurance is an insurance product which you purchase from a selected insurance provider/company by paying a specific amount of money as premiums. Upon the death of the insured, the life insurance company, or insurer provides the agreed sum to the nominee of the policyholder. Life insurance policies are normally divided into two types - whole life assurance and term life assurance policies. You can buy these policies for various tenures supported your requirements. Not only these policies provide risk coverage, you'll also use these policies to pay off your medical bills, fund children's education, and plan for your retirement.
See: Meaning and Types of Life Insurance
Benefits of buying life insurance
Like fixed deposits, life insurance has its own set of advantages. It comes with the following benefits:
Life insurance policyholders can avail of tax benefit as per the Income Tax Act, 2058.
Life assurance provides risk coverage and takes care of your near and dear ones even in your absence.
Life assurance coverage lasts for an extended duration, quite the premium paying period.
You will have an option to select from a wide range of alternative plans like term plan, whole life plan, old citizens plan, pension plan etc. as per your requirements.
It offers asset protection and access to cash as well.
Fixed Deposit vs Life Insurance - Which is the Best Investment?
If you would like to save lots and also to invest for your future, it always advised diverting your investment in Fixed Deposits. On the contrary, life insurance plans are meant to provide risk protection and to protect the financial interests of your family in your absence.
Listed below are the main differences between fixed deposits and life insurance.
1. Tenor
Fixed Deposits are suitable for long-term and as short pay term as well, ranging from 3 months to 5+ years
In, In contrast, a life insurance policy offers life coverage. Also, a guaranteed returns for the term period of 10 years, which may be extended up to a lifetime.
2. Investment
Investment in FD can be started with a minimum sum of Rs. 1000, whereas there is no maximum limit. Depending upon the invested money, the bank calculates the interest. As a thumb rule, the more you invest in Fixed Deposit, the higher return you will be able to reap in the long term.
On the opposite, in the life insurance policy, the premium of the policy differs from plans to plans and is decided on the basis of various factors such as the age of the policyholder, policy value, health condition of the insured, and so on. In monthly income plan and guaranteed return plan, you may avail investment returns as maturity benefit after the completion of the policy tenure.
3. Guaranteed Returns
Fixed deposit offers fixed returns on investment as mentioned in the beginning when you open the fixed deposit amount.
On On the other hand, a monthly income plan offers you a guaranteed and regular flow of income to meet your monthly expenses and achieve your short-term financial goals. Also, investment in savings plan like guaranteed return policy offered assured and better returns to the investors as compared to FD.
4. Withdrawal
Fixed deposit scheme offers the choice of partial withdrawal. However, breaking FD account before the completion of the maturity period affects the rate of interest of investment and leads to low Return on Investment.
However, in the life insurance policy, you can make a withdrawal after the completion of the policy lock-in period, which is generally 3 years.
5. Taxation
Fixed the deposit doesn’t offer any tax benefits
While you can take advantage of tax benefit in a life insurance policy on the premium paid
6. Loan against investments
You can take a loan against fixed deposit at a low-interest rate
You can take a loan against some insurance policies.
Choosing the Right Investment Strategy For You
To summarize, fixed deposit accounts and endowment plans are fairly similar investment options. They offer flexibility in their term periods, the deposit amounts and interest, and in some cases, the returns. However, there are important differences to consider. For instance, endowment plans consist of a life insurance component. They may even be tailored for particular savings goals like education and retirement and can provide annual or monthly cash payouts. On the opposite end, fixed deposits are less risky and are more accessible. They are also good choices if you would like to save lots of in a foreign currency. As always when choosing a financial product, you ought to carefully consider both your objectives and risk tolerance and remember to closely review the terms and conditions of the product you choose.
Depending on your requirements, a fixed deposit are an ideal investment option, if you want to accumulate wealth in a long term and gain a guaranteed return. However, if you would like to avail yourself the double advantage of life protection alongside the advantage of investment, it is okay to consider investing in a guaranteed return insurance product.
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