Fixed Deposits (FD) in nationalized banks is a preferred savings option for most of Indians. An obvious reason is the low risk profile offered by the banks for such investments. Life Insurance Corporation of India (LIC) also is a trusted partner for millions, when it comes to safeguard their hard earned money for future needs. LIC’s endowment plans are insurance products with savings whereas bank deposits are simply investment products by nature, in which you can invest for differing tenures.
A quick understanding on Bank Savings Deposit Schemes and Life Insurance Policies
Bank deposits are investment tools. You could put money into savings for prefixed tenures offered by the bank, according to your comfort and get appealing returns in your investments on completion of locking tenure. Commonly, banks do not assist you to withdraw your deposits before a given maturity date. But, with previous notification to the financial institution, you can withdraw your fixed deposits, with or without a penalty on interest rates.
On the other hand, life insurance is a risk transfer tool that you purchase from a life insurance provider by means of paying a particular amount of cash as premiums. You can purchase these policies for specific tenures, primarily based on your requirements. A life insurance policy affords an assured amount of sum commonly known as the sum assured (SA) to a nominee, upon the death of the insured man or woman. If the policy holder survives, an endowment based insurance policy will return them a lump sum. So, not only these rules provide risk coverage, but you could additionally use these policies to fund youngsters’s schooling, marriage and/or plan on your retirement.
Common Types of Bank Savings Deposit Schemes
Banks offer many deposit schemes such as Savings Bank Account, Current Account, Fixed Deposit Schemes aka Term Deposit and Recurring Deposit Schemes. But from an investor’s perspective the last two are the most common types of savings schemes used by people for getting returns.
Fixed Deposit Schemes (FD)
Here a lump sum amount is deposited in bank for a stipulated tenure insisted by the bank. A foreclosure may attract charges and cut in interest rates. 2 types of FDs are most common
- Cumulative fixed deposits : the bank or finance enterprise can pay the interest yearly.
- Non-cumulative fixed deposits : the interest is paid at shorter periods such as Monthly/Quarterly/Calendar quarter basis as per your requirement.
You can choose any of these depending on your monetary want and your funding dreams.
Recurring Deposit Schemes (RD)
Recurring Deposit is an arrangement provided to build up saving through regular monthly deposits of fixed amount over a period. Many people find it attractive because of the ease of saving and appealing interest rates. Usually banks ease the process by offering netbanking facility, automatic deductions from savings account to pay monthly RD EMIs.
Classification of LIC’s Policies
Essentially, it’s far an extended-time period funding. The most vital component of life insurance is risk transfer. They are classified as
- Endowment assurance plans – it offers coverage. It also affords appropriate return on investment (ROI), at completion of the policy coverage tenure.
- Term life insurance plans – that ensures coverage alone. So it offers the policy sum assured to the dependents of the policy holder in the occasion of his/her loss of life.
Tax Benefits Compared
A fixed deposit locked for 5 years is eligible for 80(C) exemption. But bank Interest earned from fixed deposits and recurring deposits are fully taxable at your slab rate along with applicable surcharge/cess. Because bank interest earned also is treated as income under the head ‘Income from Other Sources’. Say for example you are falling under 30% income tax slab, meaning you earn Rs.10 lakhs plus per financial year, you will be levied 30% as income tax and 0.4% cess from the bank interest you earned also. The banks usually collect this amount as Tax Deducted at Source (TDS) and the IT department will adjust it while calculating your final tax liability. The only exception from TDS deduction is, if your income earned as interest from all fixed deposits and recurring deposits with a bank is less than Rs 40,000 in the current financial year.
Until Interim Budget 2019, the limit of TDS on income earned from bank interest was Rs. 10,000.
A regular premium paying LIC endowment assurance plan such as New Endowment Plan, New Jeevan Anand, Jeevan Labh, Jeevan Umang etc are entirely subject to tax rebate. You can enjoy tax exemption under 80(C) up to Rs.1,50,000 and the maturity, even if it runs into crores, is exempted under 10(10(D)) of income tax act. Policies like LIC’s Cancer Cover are exempted under 80(D).
Return On Investment (ROI) Compared
A general thumb rule for investment is Invest for maximum total real return. This is all about considering only the return on invested rupees after taxes and after inflation. This is the only rational objective for most long term investors. Any investment strategy that fails to recognize the insidious effect of taxes and inflation fails to recognize the true nature of the investment environment and thus is severely handicapped.
Now let us consider returns from LIC’s Jeevan Labh Plan. The advantage of this plan is, its limited premium paying option. Even though the minimum tenure for this plan is 16 years, we need to pay only for 10 years. Remaining 6 years will be ‘premium holidays’. From a customer perspective they need to pay less years.
| Criteria | Value |
|---|---|
| Age | 30 |
| Basic Sum Assured | 500000 |
| Policy Term | 16 years |
| Premium Paying Term | 10 years |
| Premium | 3700 / month |
| Maturity Value | 8,56,500 |
| Total Premium Paid | 4,44,000 |
| Tax Benefit @ 20% | 88,800 |
| Net Benefit | 9,45,300 |
Now let us consider the same scenario with the help of of an RD account for 10 years and further by and FD running for another 6 years.
| RD for 10 years | |
|---|---|
| Interest Rate | 6.5% |
| Monthly Installment | 3700 |
| Maturity | 620045 |
| Interest Earning | 176045 |
| Tax deducted @ 10% | 17604 |
| Net payable after 10 years | 6,02,441 |
| Depositing in FD for 6 more years | |
| Value of 602441 after next 6 yrs | 879048 |
| Interest earned during this period | 276607 |
| Tax deducted @ 10% | 27660 |
| Net payable after 16 years | 8,51,388 |
LIC is a clean winner due to its Tax Free returns.
Withdrawal of money in an emergency : Liquidity compared
In the event of a financial crunch, people look out for loans. One such option is personal loans. However securing these loans need a good credit score and involves lot of paper work. A remedy for this is to secure a loan against a collateral. A fixed deposit, LIC policy come handy during such occasions.
Loan Facility
Securing loans from banks against the collateral security of FD is a time-efficient way to get a short-term-fund in an emergency. Advantage here is, one need not break the FD upfront. Banks allow some percentage of the FD amount as loan and the range varies between 70 to 95 percentage of the whole FD value. Interest charges on such secure loans are relatively lower in contrast with other conventional loans, however higher than interest rates offered on FDs. Usually the interest price is 1 to 3 percentage higher than the rate offered by the bank on fixed deposits. Say for example the FD interest rate offered by the bank is 6 percentage, then corresponding loan against that FD could attract 7 to 10 percentage rates to the borrower. So in effect the individual is paying 1 to 3 percentage extra.
LIC issues loans by keeping the policy bond as collateral security. One would be allowed to raise a loan against an endowment policy they hold. While repaying, one can repay the loan amount with interest or continue paying the interest part alone and allow the loan principal to be deducted at the time of maturity or claim. If earlier out standings are cleared, further loans on the same policies are also allowed. Most financial institutions like banks also will issue loans against the policy document one holds. Here again the borrower will be paying 2 to 3 percentage extra as loan interest. But the individual’s insurance coverage will be in force.
The general guidelines for issuing a loan against LIC policy are as follows.
- The maximum loan value that could be disbursed is 90% of the Surrender Value of the policy and 85% in case of paid up policies. This includes cash value of bonus also.
- The minimum period for which a loan can be availed is six months. Even if repayment of loan is happening before 6 months, interest for six months will be levied.
- If the policy becomes a claim (either by maturity or death) within six months , loan interest will be charged until that date.
- Policy to be assigned absolutely favoring LIC.
- Loan application, along with an endorsement of terms and conditions on the policy.
- A receipt for the loan amount.
- Loan interest is payable half yearly
Premature Closure
An early closure of the bank FD is authorized. However the interest rates can be revised and even a penalty may additionally need to be paid. On premature closure, the actual FD interest may be paid for the deposit for that tenure, for which the amount was kept untouched and then a penalty will be levied thereafter. As soon as closed, the deposit amount along with the interest earned will be credited to the savings account of the individual. One might also in advance close the fixed deposit for self use or may reinvest in a new FD for a better earning.
Surrender value of a policy is allowed by LIC only after three full years premiums are paid. In case of a participating policy the bonus portion also gets attached, as per rules. Surrender of policy is not recommended, because the surrender value would always be considerably low. Continuation of previous policies without getting lapsed is the preferred strategy to keep on with life insurance coverage, as the policy holder will always enjoy lower premiums and better returns. Nevertheless surrender is possible in inevitable circumstances.
So it can be understood that even though LIC allows foreclosure, it is pricey compared to FD. So getting loan on policy is preferred.
Safety of Deposits: LIC vs Bank
When it comes to investments, every individual’s primary concern is about safety. In recent years we started hearing about the collapse of financial institutions.
How safe is your hard earned money in case of the collapse of the bank?
Your deposits in a bank are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the Reserve Bank of India. It covers one’s Financial Savings, Fixed Deposits, Recurring Deposits, etc. But deposits received from overseas authorities, the central government, a state government, or another bank or any deposit received from outside of India, are beyond its scope of protection.
The sum total of principal along with interest accumulated to every depositor as at the date of liquidation/ cancellation of license of the financial institution is fully settled by DICGC up to a maximum ceiling quantity of Rs. 1 lakh.
In order to calculate the above ceiling, all the deposits maintained by an individual within the same bank and across all branches of the failed financial institution are clubbed. But, deposits maintained with different banks aren’t clubbed.
The proposed Financial Resolution and Deposit Insurance Bill (FRDI), which is aimed at call a halt to bankruptcies inside the monetary services sector, consists of a unique provision which by definition allows the affected banks to use depositors’ money to soak up some of the losses. But again the maximum ceiling quantity stands at Rs. 1 lakh.
Are LIC deposits safe?
All LIC policies are protected by Sovereign Guarantee. It is by definition is a promise by the Central Government to take up the liability of the Life Insurance Corporation of India, in case of its default.
In the Preamble of the Life Insurance Corporation Act of 1956, it says
- Policies to be guaranteed by Central Government – The Sums Assured by all policies issued by the Corporation including any bonuses declared in respect thereof and, subject to the provisions contained in section 14 the amounts assured by all policies issued by any insurer the liabilities under which have vested in the Corporation under this Act, and all bonuses declared in respect thereof, whether before or after the appointed, day shall be guaranteed as to payment in cash by the Central Government.
- Liquidation of Corporation – No provision of law relating to the winding up of companies or corporations shall apply to the corporation established under this Act, and the Corporation shall not be placed in liquidation save by order of the Central Government and in such manner as that Government may direct.
Under section 37 and 38 respectively. So when it comes to safety of deposits, LIC stands tall.
Additional Benefits Compared
Indexed below is a number of the other advantages of having an LIC policy that people generally over look.
Conclusion
A healthy financial planning is based on both saving and protection. Although, the tenure and the amount is less for bank savings deposit schemes, as compared with LIC, safety and security always comes first.
With fluctuating market conditions, bank interest gains are falling appreciably. But long term investment gains on LIC policies aren’t falling significantly. Besides this, LIC gives life cover and a bunch of additional benefits, which may be very vital in the present world order and changing lifestyle.
Hence, LIC is the option of saving as compared to bank fixed deposits and recurring deposits, as it offers both protection and saving.