Fixed Deposit rates have been dipping for several years. From 14% in the past to 6.5% today, FDs are no longer the common man’s choice of investment tool. Gaining popularity in its place are Guaranteed Income insurance plans, which not only provide tax-saving opportunities along with life cover but also eliminate all the weaknesses of FDs, such as dipping interest rates and non-goal-oriented savings.
Any interest earned beyond INR 15,000 on bank accounts, whether it a fixed deposit account or a savings account, are taxable. Whereas, returns earned on a Guaranteed Income insurance plan, which is similar in nature to Fixed Deposits since it gives guaranteed returns, are completely tax-free.
Locked-in Interest Rate
Fixed Deposit interest rates have an in-built re-investment risk. This means that the interest rate at which you will start a 5-year Fixed Deposit scheme today will reduce when you renew the same scheme after 5 years. In the last 20 years, we have seen FD rates dip from 14% to 6.5%. This re-investment risk is always present.
On the other hand, the interest rate in Guaranteed Income insurance plans remain constant throughout the policy term, which could be 5, 10, 20, or more years depending on the plan you have chosen.
People in India are prone to break FDs. They may have started investing in an FD scheme with an intention to fulfil a long-term financial goal, such as their child’s education or marriage. However, they easily break into their savings to satisfy short-term financial goals. What we are trying to get at is that investments in FDs do not create long-term compulsion. Contrarily, investment in a scheme where, say, there’s a penalty every time you withdraw or stop investing, creates compulsion to stick to your financial goals.
Guaranteed Income insurance plans create compulsion, that is, your funds get locked in for a longer period. Under these products, you also have the option of selecting the policy term based on your requirements.
FDs do not have life cover, but Guaranteed Income insurance plans do, thus safeguarding your family and their aspirations in case you are no longer physically present with them.
What to Keep in Mind when Selecting the Policy Term
After how many years you wish to achieve a particular financial goal should be the parameter to decide your policy term. For example, let’s say your goal is to save for your child’s education, who is currently 3 years old. Given that most students in India enter undergraduate university at the age of 18, your policy term should be 15 years (18 – 3).
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