Fixed Deposit vs Life Insurance – Where to Invest? (2024)

FAQs

Which is better FD or life insurance? ›

The returns on FDs are low, but they are predetermined. Life insurance usually offers better returns than FDs. FDs are suitable for short-term as well as long-term investments. On the other hand, life insurance is a long-term investment.

Investors in fixed deposits (FDs) commit a specific amount for a predetermined period at a fixed interest rate. In contrast, equity investments allow flexible investment amounts. Returns: FDs typically offer returns ranging between 5%-9%, which are relatively lower than other investment options.

Brokerage accounts, education accounts, and retirement savings plans — like IRAs and 401(k)s — offer more value and higher return on investment (ROI) for your money than cash value life insurance.

Since FDs offer assured returns, there is almost no risk of principal loss. However, investors should remember that the rate of return from such an investment is limited when compared to other high-risk options.

The death benefit provided by life insurance policies and their tax-deferred advantages offer a unique form of risk management that other investments don't have. They're an attractive option for conservative investors seeking steady growth over time.

However, disadvantages of FDs include penalties for premature withdrawals and limited returns compared to riskier investment options. Ultimately, deciding whether FDs align with your financial goals requires carefully weighing the benefits and disadvantages in the context of your unique circ*mstances.

Fixed deposits offer an attractive rate of interest and are insured by the government. Moreover, they are a great way to boost your savings and earn tax-free income. FDs are an excellent way to build up your savings while earning some interest on your money.

There are two key advantages of locking your savings in the fixed deposits at the current interest rate. One, the interest rates have risen substantially in the past few months as a result of the RBI's monetary policy. Second, the interest rates may see a fall towards the end of this calendar year.

Tax Laws Favor Life Insurance

One reason why the wealthier may consider purchasing life insurance has to do with taxation. Tax law grants tax benefits to life insurance premiums and proceeds, affording asset protection in the process. The proceeds of life insurance are also tax-free to the beneficiary.

Do millionaires invest in life insurance? ›

Wealthy individuals with a net worth over $1 million can use life insurance to provide for their loved ones in the event of their death, as an investment vehicle, or as protection against estate taxes.

Life insurance policies, such as Farm Bureau Insurance's whole life policy, often come with a cash value component. As you pay your premiums, a portion of them goes towards building a cash value within your policy. Over time, this cash value can grow on a tax-deferred basis, and this allows you to accumulate wealth.

Things to Consider Before Investing in a Fixed Deposit

Tenure: Choose a tenure that aligns with your financial goals, whether short-term or long-term. Interest Payout Frequency: Decide if you want periodic interest payouts or prefer to accumulate your earnings until maturity.

The Bottom Line

Safe assets such as U.S. Treasury securities, high-yield savings accounts, money market funds, and certain types of bonds and annuities offer a lower risk investment option for those prioritizing capital preservation and steady, albeit generally lower, returns.

Single premium whole or universal life insurance policies are the types that generate immediate cash value. However, you can also secure immediate life insurance coverage with a no exam term or whole life insurance policy.

Term insurance covers you only for a specified time period — 10, 20 or 30 years, for example. Permanent insurance is as it sounds — coverage that remains in place until you die.

Fully underwritten life insurance

If you're healthy, fully underwritten policies will generally be the cheapest option.

In a Cumulative Fixed Deposit, the interest earnings are added to the principal amount, giving you the benefit of compounding. Due to this, the depositors get interest payment only at the maturity. This type of fixed deposits are best suited for those looking for long-term investments.