Yes, the tax benefits associated with life insurance policies do help make the investment more attractive. The Public Provident Fund also offers the 20% tax rebate under section 88 of the Income Tax Act, 1961, as do small saving schemes like post office deposits and national savings certificates. You may also avail of Tax benefits under section 80CCC with certain plans. And there are other investment options that give you higher returns than insurance. But these don't offer you security, the risk cover that helps you overcome the uncertainties of life. The primary function of life insurance is to cover you against financial losses arising out of sudden death or disability. It also offers returns and tax savings. Life insurance, as an instrument, is hence a good marriage of risk cover, returns and tax benefits.

If monetary returns are evaluated in isolation, a fixed deposit (FD) offering 9.5% might look very good in this depressed market. But insurance offers other benefits along with returns.

Look at security for instance. If you invest in an FD and happen to die, your nominee can claim only the amount of the FD. If you live, you will get back the sum of the FD with the desired interest.

Compare this to a life insurance policy. For a sum of Rs 5,000 invested in a FD, you would get the same amount at the end of the year whereas for a small insurance premium of say Rs 5,000 per annum, you could buy yourself a cover of around Rs 50,000 to Rs 2 lakhs depending on your age and type of policy. If you happen to die during the tenure of the policy, your family members would get Rs 50,000 to Rs 2 lakhs as a benefit. In case you live, you will get back the entire sum assured with maybe a decent return.

Evaluate the two options. For a small "notional loss" in returns, you are running the risk of leaving your loved ones uncared for if something happened to you. On the other hand, with an insurance policy, peace of mind will never be an issue. That’s something money can seldom buy.