Comparison of PPF and life insurance: Which comes first?

  Some people compare life insurance with other saving instruments such as PPF as both can be saving avenues as well as allow one to reduce one's tax outgo. However, strictly speaking PPF and life insurance are actually two very different instruments with few features in common. Sound financial planning rests on the twin pillars of protection and savings. Protection always comes first because once you are fully insured even if something unfortunate happens to you, your family will be able to maintain its standard of living without any trouble. Only after ensuring financial protection can you think about saving for other goals such as your child's education, his/her marriage, your retirement etc.

An example will bring out why the life risk element is the primary need in financial planning i.e. protection first, savings next: A person, aged 30 with good taxable income, wants to create a corpus for use after 15 years for the wedding of his daughter who is now 5 years old. He has no insurance. He plans to deposit Rs 1,00,000 every year for 15 years in PPF expecting to get Rs 31,17,278 at the end of 15 years and this would be tax free.



If he takes an endowment policy for 15 years with Accident Benefit and pays about Rs 1,00,000 per year he can get an insurance cover of approximately Rs 15,00,000 with bonus taking LIC's current endowment plan as an example. Assuming a bonus rate of 38 per 1000, at end of 15 years he will get tax-free maturity proceeds of about Rs 23,55,000.

Now if this young man dies just after 3 years, let us say while driving his car, from PPF the family will get Rs 3,55,294 only. From the life insurance policy, the family will get basic sum assured of Rs. 15,00,000 plus bonus of Rs. 1,71,000 for three years plus accident benefit of Rs 15,00,000 totaling Rs 31,71,000. Even if the death is not due to an accident and the accident benefit is not available, the family would still get Rs 16,71,000 tax free.

It is to be noted that in case of life insurance an estate (here the provision for marriage) was created the moment he took a policy and he pays for the estate over 15 years or as long as he lives.

In the case of PPF he has to pay for 15 years i.e. create and then get the corpus as the estate is ready only after the last payment. If death intervenes he will only get whatever he paid with interest.

Investors are advised to check the yield offered by both instruments and do their own calculation and comparisons when deciding to invest. However, the point being made here is that in life insurance you create and save. In all other forms of savings you save and create, provided you live to complete the scheme.

Now you decide which is a better way to provide for future needs and which instrument is more versatile in terms of use while in force?

Protection first, savings next is the best advice. Your planning should rest on two pillars, protection and saving.