Life Insurance Vs PPF - Which One is Better?

PPF (Public Provident Fund) plans and life insurance policies are taken to secure your and your family's futures. You can invest in one or both of these plans depending on your financial needs or goals. 
 

However, before you make that leap and choose one, you should first understand what purpose both these plans serve and they are different from each other. So, let us explore the difference between PPF and life insurance in India.

What is a PPF? 

PPF is short for Public Provident Fund. It is a long-term debt investment scheme backed by the Indian government. It has a tenure of 15 years that can be extended in blocks of five years after maturity, and the current interest rate of PPFs sits at 7.1%* p.a.
 

It allows individuals to open an account for ₹100 and make annual investments at a minimum of ₹500 up to a maximum of ₹1.5 lakhs. In its essence, PPF is an investment tool.
 

Most people use a PPF as a savings tool to build a corpus for their retirement, as it offers guaranteed, risk-free returns and complete capital protection. Since the returns are fixed by the Central Government, some investors also use PPFs as a diversification tool for their portfolio.

What is Life Insurance?

Life insurance in India is a contract between the insured and the insurance company where an insured individual is offered life insurance coverage against life's uncertainties in the form of a sum assured amount. 
 

It is an insurance product that offers a death benefit to the policy's nominee upon the insured's untimely death during the policy's term. The insured must pay regular premiums or a lump amount on policy purchase to get coverage under this policy.  
 

Life insurance is primarily a protection tool. However, it can be supplemented with savings, investment, health covers, wellness features, etc., to offer comprehensive life insurance solutions.
 

Depending on your coverage needs, you can also buy many types of life insurance policies online with Tata AIA.

Difference Between PPF and Life Insurance
 

[Disclaimer^&: The stated PPF interest rates in this blog were taken on 01/09/2023 at 5:05 p.m. from the Department of Economic Affairs' website. These interest rates are subject to change every quarter as decided by the Central Government of India.]
 

Please refer to current interest rates from the official portal before making any investments.

PPF Vs Life Insurance: How Are They Alike?
 

• Partial Withdrawals 
   

  Under a PPF account, you can make partial withdrawals up to a specified limit from your account balance. This feature is available 7 years after the opening of your PPF account. 
   

  Under a ULIP^@ life policy, you can make partial withdrawals after the five-year lock-in period. This period is related to the money invested in funds. To know more, read our blog on ULIP Withdrawals. 
   

• Loan Facility 
   

  PPFs offer loans against your account from the third year until the end of the seventh year. Whereas traditional life insurance policies, like endowment plans, offer loans after a lock-in period of three years is completed.
   

  In the case of a PPF, 60% of the account's credit balance can be taken as a loan. The loan amount against life insurance in India will depend on its surrender value and policy type. It can be as high as 80% - 90% of the surrender value for traditional life or endowment plans. 
   

• Maturity Benefits
   

  Both plans can offer maturity benefits at the time of maturity. PPFs offer maturity benefits as a lump sum amount on policy maturity. This amount is the sum of your total deposits and the interest compounded on it annually over 15 years. 
   

  Life insurance policies with an ROP (Return of Premium) benefit will offer a return payment of the premiums paid during the policy term as its maturity benefit.
   

• Revival 
   

  Both plans can be revived if you ever stop paying your premiums or making deposits. 
   

  If you miss making a deposit under your PPF account, you can revive the account next year. Similarly, with life insurance, the revival period can vary across insurers. For example, Tata AIA life insurance policies can be revived within five years from your last premium payment. 
   

• Regular Payments 
   

  Life insurance in India and PPFs both require regular payments or deposits to be made at specific intervals. For a PPF, a minimum of ₹500 must be deposited every year; for a life policy, the premium amount and tenure are decided by your insurer.

Life Insurance Vs. PPF Tax Benefits
 

• Tax Benefit on Investment:
   

  The annual premium payments and amounts invested in PPFs or life insurance policies are eligible for tax deductions up to ₹1.5 lakhs under Section 80C of the Income Tax Act.  
   

  For life insurance policies, the deductions are restricted to 20% of the sum assured for plans purchased on or before 31/03/2012 and 10% of the sum assured for plans issued on or after 01/04/2012. 
   

  For policies taken on or after 01/04/2013 for individuals suffering from a disability or severe disability, the tax deduction limit will be 15% of the sum assured. However, the disability should be as described in Section 80U or suffering from an illness as mentioned in Section 80DDB. 
   

• Tax Benefit on Returns:
   

  The returns earned and the maturity benefits from your PPF account are tax-free. For life insurance policies, the death benefit is tax-free. Both can be claimed under Section 10(10D) of the Income Tax Act, 1961.
   

  Maturity benefits under life policies are tax-exempt unless the annual premiums paid exceed 10% (20% for policies issued after 01/04/2003) of the sum assured.

Life Insurance Vs. PPF: Which One to Buy?

Using the information given above, we can deduce that life insurance policies and PPFs serve different purposes, and the rationale for buying either scheme is different.  
 

• PPF can be a great option if your goal is to build a guaranteed corpus or if you need guaranteed returns. The returns are guaranteed and tax-exempt, so they are perfect when planning long-term financial goals or building up retirement funds. 
• Life insurance policies will be perfect if you want to ensure your family's financial security in your absence. The death benefits are always tax-exempt, and any maturity benefits paid out may also be exempt under certain conditions.

Why Should You Choose Life Insurance Over PPF?

When it comes to choosing between the two, most people tend to opt for a life insurance policy as they are more flexible in terms of policy tenure, payment methods and plan types. 

Both plans offer fixed returns on maturity that are tax-exempt, but life insurance policies can offer coverage that is about 20 times more than the insured's annual income. In contrast, PPFs will only offer the amount contributed plus the applicable interest on maturity. 
 

If protection is your main concern, then a life insurance policy may be the better choice.
 

When looking at it from an investment point of view, PPFs are great for risk-averse people looking to get fixed returns, while ULIP plans offer market-linked returns.

Conclusion
 

Life insurance in India and PPFs are essential for long-term financial planning as they offer a low-risk way to ensure financial stability in the future. They both serve different purposes. Life plans are for insurance, and PPFs are for savings.
 

Hence, you must assess your financial obligations, future goals, current financial situation and any existing liabilities before opting for either – But if you have decided to buy a life insurance policy, consider buying one of Tata AIA's life insurance policies.