Should I start investing in PPF or take a life insurance policy is a question asked quite frequently. Though these two are completely different products and this question PPF or LIC should not be even asked as comparing them is like comparing chalk and cheese.
The thing is; for many individuals investing means somehow provide proofs for tax deduction under 80C. Since premium paid towards life insurance and contribution in PPF both can be claimed under 80C thus the question LIC or PPF.
Similarities in LIC and PPF
There are few similarities in both LIC and PPF -
- Multi-year contribution – In both of these instruments you need to contribute for long periods. In case of PPF at least 15 years where as in case of life insurance you need to pay premium for 15, 20 or even 30 years based on the policy terms.
- Regular contribution – In both of these instruments regular contribution is needed. At least once in year you will have to invest some amount in PPF same in case of LIC you do need to pay the annual premium.
- Tax relief – Both of these instruments provide tax relief as amount invested with in a Fiscal year or premium paid for life insurance can be submitted as proof for tax deduction.
Changing the mindset
Though there are few similarities but that doesn’t make PPF and LIC similar. These two are vry different products with their own importance but it should not be LIC or PPF but LIC and PPF. Let us see why?
For any financial planning and long term stability there are two things we look for -
- Protection
- Saving
Protection
In financial terms protection means accounting for unfortunate circumstances like death or medical emergency and that’s where insurance in form of life insurance or health insurance helps. That should be your idea for buying life insurance; to safe guard the near ones from the financial impact of the death of the insured.
Primary purpose of life insurance should not be looking for survival benefits upon the completion of the policy tenure. That is why it is even better to buy term insurance than life insurance but that is another topic.
Saving
In financial planning you should think of protection first and then for saving for goals like buying a house, kid’s education, retirement planning. When you have to save for these goals that’s where you will have to look for saving instruments like PPF.
So, you see it is more of mindset change for many of us and start accepting the fact that not every instrument out there is for saving. We need to change our thought process too that financial planning is not only somehow providing proofs for 80C at year end.
You need to think of financial planning as two distinct parts -
- Providing protection – Buy life and health insurance for these needs.
- Saving for goals – Look for investments like PPF, SSY, SIPs in mutual funds for specific saving goals.
What happens in case of death
It’s the accounting for unfortunate circumstances that we have to put protection first and this is the case when life insurance scores over any small saving scheme like PPF.
If subscriber dies, in case of PPF nominee will get whatever is invested till death + accrued interest for that period.
In case of life insurance nominee will get sum assured irrespective of premium paid.
Let’s see it with an example -
Let’s assume a person aged 28 starts both LIC and PPF in the same year, he buys a LIC policy with 1500000 sum assured for 15 years term. In that case, premium he needs to pay will be around Rs. 1.2 Lakhs per year.
Let’s assume he invests the same amount in PPF every year i.e Rs. 1.2 Lakhs.
Unfortunately the person dies after 3 years then in case of PPF, nominee will get whatever is invested in these 3 years + accrued interest which comes to around Rs. 4,21,000 if we take 8% as interest.
But in case of LIC nominee will get sum assured which is Rs. 1500000 + Bonus. Bonus announced by LIC is in the range 36 – 40 per 1000. If we take it as 40 in this case then bonus for 3 years will be 180000. So nominee will get total 1500000 + 180000 = 1680000 (Rs. 16.8 Lakhs).
Comparison points between LIC and PPF
If you are convinced and agree with me that it is not LIC or PPF but LIC and PPF then you don’t even need to read further. If you are still not convinced and looking for comparison between LIC and PPF then let’s see some of the comparison points too -
- Yield – If you are buying LIC policy with investment in mind then it is a sloppy investment. Return on maturity benefit comes in the range 4% – 5% only. Where as in case of PPF, even though the rates are down (7.6% in Jan, 2018 - Mar, 2018 quarter), you will get more than LIC policy.
- Ease of investment – In ease of investment both are similar. In case of insurance policy there are options to pay premium
monthly, quarterly, half yearly or annually. In case of PPF also you can invest in lump sum or invest monthly.
In case of PPF minimum contribution is Rs. 500 which means you can pay the minimum amount of 500 in a year to keep your subscription alive. That may be helpful if you have some financial problem in any year.
In case of LIC you will have to pay the fixed premium otherwise your policy will lapse.
- Stopping investment – In case of PPF you can take loan or do a
partial withdrawal as per the rules of PPF. Pre-mature closure
is also possible after 5 years but only for certain conditions like terminal illness, higher education.
In case of LIC policy that can be surrendered any time but you will get surrender value as per rules only after paying premium for 3 years.
- Tax benefits – LIC policy premium amount can be claimed as deduction under 80C (Current limit of 80C is Rs, 1.50 Lakhs
inclusinve of all savings). Amount invested in PPF can also be claimed as deduction under 80C. So both provide tax benefits
that way.
Returns from PPF are tax free. If you close your PPF account after completing 15 years then you will not have to pay any tax on the returns.
Maturity amount on your LIC policy is also tax free except for this condition - If the premium payable in any year exceeds 10% of the actual sum assured, then the policy proceeds would be taxable in the hands of the insured.
That's all for this topic PPF or Life Insurance. If you have any doubt or any suggestions to make please drop a comment. Thanks!
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