Difference Between Term Insurance, SIP and FD
Updated On Aug 06, 2021
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Do you have trouble determining whether to invest your hard-earned money in a fixed deposit (FD), term insurance plan or systematic investment plan (SIP)? If you are trying to figure out which financial product would provide you with the most return on your investment, you have clicked on the right article.
While all three are fantastic investment opportunities, they are distinct entities with distinct traits and attributes. To assist you in making an informed decision, let us evaluate the three investment modes on crucial financial aspects.
What is a Term Insurance Plan?
A term insurance plan is a type of life insurance policy that offers predetermined death benefits to the beneficiary if the life assured dies before the policy term is completed. The policyholder has to pay premium instalments to the insurance provider to avoid policy termination. These premiums can be paid in a lump sum, monthly, quarterly, half-yearly and annual instalments. Among all the life insurance policies, term insurance plans are regarded as the most affordable, easily accessible and understandable plans. All these features have undoubtedly led to their increasing popularity among the masses.
What is a Fixed Deposit Scheme?
A fixed-rate deposit account (FD) is a type of investment account offered by banks or non-bank financial institutions (NBFCs) where you can deposit a lump sum amount for a set period of time and earn a predetermined rate of interest. The investor receives the interest and principal amount at the conclusion of the agreed-upon tenure. Breaking an FD in the midterm is not recommended since it has a punishment. Interestingly, fixed deposits are regarded as the safest investment option because they provide guaranteed returns.
What is a Systematic Investment Plan?
A systematic investment plan (SIP) is a type of mutual fund investment strategy. It's a disciplined and automated method of investing that allows people to deposit a set amount of money at predefined periods (weekly, monthly, quarterly, etc.). SIP plans can be launched with as little as $500 per month. However, SIPs carry some risks because they are market-linked.
What are the Differences Among Term Insurance Plans, Fixed Deposit Schemes and Systematic Investment Plans?
Here is the list of differences among term insurance plans, fixed deposit accounts and systematic investment plans which makes them unique.
- Tenure - FDs provide an option of selecting your own term, which can range from 6 months to 10 years or longer. The investment horizon of a SIP should be long in order to gain the rewards. The compounding factor aids in wealth generation and the building of a corpus. In the case of term insurance, the minimum term limit of a plan is for 5 years. You can decide the adequate term duration in agreement with the insurer.
- Investments - SIPS allows you to start investing in mutual funds with as little as Rs.500 each month. It also gives you the freedom to adjust the amount and term plan at any time. Furthermore, the frequency of auto-debits can be set to suit your needs. FDs, on the other hand, need a one-time payment of Rs.1,000-5,000 for a set period of time. Term insurance does not offer any investment opportunities. It just provides life assured with life coverage.
- Risks & Returns - FDs are a low-risk investment. Since the interest rate is fixed for the whole term, there is a slight possibility of losing money. SIPs, on the other hand, carry considerable risk because they are affected by market fluctuations. However, the diversification among different types of mutual funds, such as debt funds, equity funds, hybrid funds, helps to disperse the risk element throughout the board. As mentioned before, since term plans have no investment opportunities, there are no returns.
- Tax Benefits - If the deposit duration is shorter than five years, the tax on the FD is levied at the individual's current income tax bracket. If the equity mutual fund units are sold within a year of acquisition, there is no capital gain tax. In term insurance plans, tax deductions and exemptions can be enjoyed under different Sections of the Income Tax Act.
SIP and FD are popular investment options for Indians looking to build wealth. On the other hand, term insurance plans provide a financial safety net if something happens to the family’s sole breadwinner. All the options are quite different from each other. Hence, the decision to select among these options should depend on your needs and requirements and not on any recent trend or fad.
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.