It is common knowledge that CDs and life insurance are great financial planning tools. However, even though they are quite similar, these two saving vehicles have their unique strengths and weaknesses that you should be aware of. In this article, we have made a comparison between CDs and life insurance to help you understand them better.
1.Security of your funds
Usually, CDs are issued by banks. And these banks are insured by the Federal Deposit Insurance Corporation (FDIC). So, in the event that your bank fails, the FDIC will pay up to $250,000 for your CDs. In contrast, life insurance is issued by insurance companies. What’s more, they are not insured by any government agency. Assuming your insurance company fails, there will be no way for you to recover your funds. This is why we advise that you choose a financially sound insurance company before buying life insurance from them.
If you have short term goals such as buying a car or making a down payment on a house, then you should get CDs. The reason is that the maturity periods of CDs ranges from one month to a couple of years. On the other hand, if you are planning for retirement, or other long term goals, life insurance is obviously the better choice.
3. Return on interest
With CDs, you are guaranteed a return that is valid for a certain duration of time. In addition, the interest rates you earn will vary due to market forces. Unlike CDs, your life insurance plan guarantees you a minimum interest rate that is not dependent on conditions in the financial market.
Like life insurance, CDs are also taxable. However, there is a difference in the method if taxation is employed. For CDs, your earnings are taxed in the year you earn interest even if you don’t withdraw money. With life insurance, your earnings or benefits build up and are seen as tax deferred. The only time you are taxed is when you withdraw money from your life insurance plan.