Difference between PPF and Life Insurance

PPF and Life insurance are completely different things instruments with a few common features. A sound financial planning lies on the pillar of protection and saving. If you have a family, the first thing that you do is find avenues to protect them and only when that is done you plan for saving for your retirement or your child’s education or marriage etc.

Public Provident Fund

PPF is a tax-saver’s favourite long term debt scheme. All you have to do is put a minimum of Rs.500 and the maximum amount allowed is Rs.1.50 lakh in a PF account in a financial year. The deposit amount is deductible under Section 80C of the Income Tax Act, 1961. The contribution, interest and the maturity amount under this scheme is tax free.

Life Insurance

You need to pay a premium at regular intervals for life insurance to avail protection. The sum assured is the amount of risk cover that is provided by the policy. The sum assured is paid on death or maturity, depending on the type of insurance that you have purchased. Premiums paid towards the insurance is eligible for deductions under Section 80C of the Income Tax Act, 1961.

Both these instruments can be compared on the following basis:

• Safety and legality

Both PPF and life insurance are considered to be safe. PPF is a central government scheme. Government owned Life Insurance Corporation and other IRDAI regulated financial institutions offer life insurance.

• Revenue

The yield in PPF is 8.7% per annum and changes as per the government rules. Life insurance yield differs from insurer to insurer. The typical yield is 4-6% on death benefit. But this is subject to various factors such as the time of death from the start date of the policy.

• Flexibility

When an investor is investing in PPF, he gets to choose an amount ranging from Rs.500 to Rs.1.50 lakh per financial year. It can be invested in a lump sum or in instalments. Life insurance on the other hand requires you to pay premiums that can be flexible or not depending on the provider. The buyer can however choose the sum assured and pay premiums accordingly.

Both PPF and life insurance can be revived easily. PPF’s tenure is 15 years and life insurance’s tenure ranges from 5-25 years. Investor can have only one PPF account but can have more than one life insurance.

• Liquidity

In PPF, withdrawals can be done only after 7th financial year. It is subject to restrictions and cannot be closed before 15 years.  Loan facility is also available from the 3rd year of opening a PPF account. Life insurance has a lock in period of 3 years after which you can take loan on the amount insured.

• Use as a financial instrument

Life insurance is treated as a property which can be transferred, mortgaged or gifted. PPF on the other hand cannot be used as a collateral as it is not attached by creditors.

• Tax Saving

Investment in PPF and life insurance is eligible for tax deductions under Section 80C of the Income Tax Act, 1961. The yield in PPF is tax free but life insurance yield is taxable if premium paid each year is more than 10% of the sum assured.

• Convenience

PPF can be opened in post offices and designated banks only. Life insurance can be opened at any insurance company.

• Compulsion to maintain the investment

Public Provident Fund contributions can stop at any time. Premiums for life insurance is to be paid cannot be missed for the lock in period. The life insurance can be revived subject to certain conditions and once the unpaid premiums have been paid.

• Attachment to creditors

PPF cannot be attached by creditors. Life insurance can be attached by creditors.

• In the event of death

In PPF, whatever is saved along with the interest till the death is paid to the nominee. In life insurance, the sum assured will be paid irrespective of the premiums that were actually paid.

Before you decide to take either PPF or life insurance, calculate and compare which will work out better for you. Ensure there is enough protection and then move on to saving.