Question

Explain the difference between Employee Provident Fund (EPF) and Private Retirement Scheme (PRS)

Your mother want to buy life insurance for you. Explain to your mother the difference between takaful and life insurance.

Answer 1

Employee Provident Fund is a scheme that provides monetary benefit to all salaried employees after their retirement. Its management is done by the Employee Provident Fund Organisation of India. This scheme is very helpful to individuals as it creates a small asset or fund for them for after their retirement. Any firm having more than 20 employees must register with EPFO. Here, when you join a firm, in every salary of yours, 12% from the employer's side is contributed to EPF account. This amount receives a fixed level of interest. This amount with interest is tax exempted.

Whereas, Private Retirement is a voluntary long term savings and investment scheme which helps individuals to save more for after retirement. PRS offers various options for investment based on individual's retirement goals and needs. The key difference between these two schemes is that it is mandatory for employees under service contract to contribute to EPF. Whereas PRS is a voluntary scheme for people above 18 years.

Takaful is a type of joint guarantee. Here a group of participants contribute to a pool of money where they mutually agree to protect each other by compensating participants if any suffer from the insured peril. Whereas, in life insurance, it is a contract with insurance company. The insurance company pays a lumpsum amount for life insurance and covers the risk in general insurance. In exchange the individual has to pay the fixed premium amount for coverage.

Takaful and conventional insurance shared the same objective that is to cover the risk and protect the individual or their possession. The main difference between the two is that takaful is a risk transfer model whereas conventional insurance is a risk sharing model.