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Difference Between FD And Guaranteed Income Insurance Plans

Updated On Aug 16, 2021

Since childhood, we have been instructed to save money for the future. Many of today's financial and investment opportunities ensure a return on investment, helping you to create fortune and save for tomorrow. Fixed deposit and guaranteed income insurance policies are the two most popular investment plans among the different types of investment alternatives available that offer guaranteed returns that are revealed upfront. In order to obtain a better understanding, let's learn more about the differences between the two alternatives.

What are Fixed Deposits?

Bank-issued FDs are viewed as a risk-free investment with assured returns. Investments in fixed deposits can be made for as little as one year or as much as ten years. In addition, interest earned on fixed deposits is completely taxable and is factored into your tax bracket. Hence, analyzing post-tax returns is crucial, especially if you have a high tax rate.

What are Guaranteed Income Insurance Plans?

Guaranteed income insurance plans include both insurance and a return guarantee. Since the assured returns products qualify for the EEE exemption under Section 10 (10D) and Section 80C of the Income Tax Act, they generate tax-free returns. Guaranteed income insurance plans are available for up to 30 years and often deliver higher annualised returns over time. It's important to note that these returns are tax-free. Moreover, life insurance helps provide death benefits to the beneficiary if the life assured dies. 

What is the Difference Between FD And Guaranteed Income Insurance Plans?

Here's a comparison of fixed deposits and guaranteed return insurance policies to help you decide which is the best option for you.

  • Tenure - Fixed deposits are available in terms ranging from one to five years and can be utilised for both long and short-term investments. In contrast, the guaranteed income insurance policy offers both life insurance and guaranteed returns for a minimum policy tenure of 10 years, which can be extended to 30 years or longer.
  • Investment - You can start investing in fixed deposits with a minimum of Rs. 1,000. On the other hand, the maximum investment is limitless. The coverage premium for guaranteed income insurance plans varies from plan to plan. It is determined by a number of factors, including the life assured's age, the tenure selected, and so on. Depending on the plan, it normally costs between Rs. 2500 and Rs. 5000 each month.
  • Returns - Fixed Deposits offer a guaranteed return on investment and are insured up to Rs 5 lakhs by the Deposit Insurance and Credit Guarantee Corporation (DICGC). You can earn income on your fixed deposit on a monthly, quarterly, or annual basis. In comparison, the guaranteed income insurance policies guarantee a set of predetermined returns.
  • Withdrawal - Fixed deposit schemes that are partially withdrawable are available. Breaking an FD account before it matures, however, affects the investment's interest rate, resulting in a low return on investment. In guaranteed income insurance plans, premature withdrawals are also authorised after 3-5 years of policy length. Your returns, however, will be less than what was initially promised.
  • Payout - You must take the payout amount as a lump sum at the end of the policy period if you have a fixed deposit. You can invest the collected funds in long-term annual or monthly instalments in guaranteed income insurance plans. You might also opt for a lump-sum payout of the entire corpus.
  • Taxes - Fixed deposits, in most circumstances, do not offer any tax advantages. You can, however, invest for a five-year period in tax-saving fixed deposits and get tax benefits under section 80C. You can obtain a tax benefit on the premiums paid and the maturity benefits from a life insurance policy under sections 80C and 10(10D) of the Income Tax Act 1961.

Take Away

Fixed deposit accounts incentivize saving by allowing you to invest for one to five years. In contrast, insurance companies' guaranteed income insurance plans are suitable if you have a long investment horizon and plan for the future. Guaranteed income insurance plans are an excellent method to maximize your after-tax earnings in a high tax bracket. Fixed deposits, however, may be a good option for you if your income tax rate is low. You should also consider investing in a guaranteed income insurance plan if you do not have a separate term insurance policy. 

Also Read: What Is Surrender Value? How To Calculate Surrender Value?

Why is Term Insurance Plan Essential for Every Parent?

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.

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