Are money back schemes of life insurance companies better than fixed deposits because they give tax free returns? How do they compare?
Lalita Reddy, Hyderabad
It is unfair and unwise to compare these two contrasting financial instruments. A fixed deposit, as the name suggests is for saving money, an insurance is first for risk protection and then for savings and investments or a combination of the two.
One of the benefits of taking a money-back plan is that during the term of the policy, the insured receives tax-free fixed proportions of the sum assured at regular intervals. On maturity, the insured receives the balance portion of the sum assured plus the bonus/participating profit/ guaranteed addition for the term of the policy, which is also tax-free. This plan is suitable for people who require lump sum amounts in future to meet specific expenses, such as children’s education or marriage. The policy provides insurance protection for the family as well as provision for old age. In contrast, an FD locks-in money for a predefined tenure and pays out the gains at the end of the tenure. Moreover, interest on fixed deposits is fully taxable. Strictly going by the returns – there may not be much difference with the gains you’ll have by putting money in both these instruments. Do remember that generally the tenure of a money-back policy is much longer than an average lock-in offered by fixed deposits.
