There are various types of life insurance plans in the market, ranging from term to unit linked plans, money back to whole life plans.The insurance plan that you choose mainly depends on factors like your financial goals, age, dependents and income. 

If you are looking for a plan that gives your life cover and long-term savings with reasonable returns, then money – back policy is what you can consider looking at. Money-back policies have been a popular investment instrument with conservative investors for many years now, owing to its benefits. They help you to meet your recurring expenses such as buying a car or paying for child’s school fees; build a corpus for wealth creation; and provide financial security for your family.

Understanding How Money-back Policy Works

Money-back policy is basically an endowment plan which periodically pays a certain percentage of sum assure during the policy term. If the policyholder survives the term, he gets the maturity benefit along with accrued additions such as bonuses. In case the policyholder dies, then the surviving defendants received the entire sum assured amount along with a bonus, irrespective of the percentage of the sum assured that was paid periodically before the policyholder’s death.

A money-back policy also offers tax benefits under Section 80C and Section 10(10D).

Let’s take an example to see how a money-back policy works. Subroto is a 30 year old male, who earns Rs11,00,000 per annum. He opts for ‘ICICI PrudentaiCash Advantage’money-back plan with 10 years annual premium payment duration. The policy term is 20 years. As you can see from the screen shots below, he will get around Rs4,75 lakhs in the form of guaranteed cash and maturity benefits @ 8% rate of return. Out of this 4.75 lakhs, Subrota will get a guaranteed amount of around Rs 1.46 lakhs total as periodic payments for the next 10 years after the premium payment term is over. The tax benefits will amount to around Rs1.45 lakhs.

In case, Subroto dies during the policy term, his nominee will get around Rs4.87 lakhs as death benefit.

Advantages of Money-back Policies

1.    Bonus benefit

The primary advantage of money-back policies are the bonuses given either during and / or at the end of the policy.The bonus is a part of profits shared by an insurance company with its customers. Such bonuses are available only on participating insurance policies such as money-back policies.  Bonuses increase the value of your policy. There are usually three types of bonuses:

a. Reversionary Bonus: This type of bonus is declared annually and is paid at the time of maturity or claim. They are calculated as a percentage rate, which applies to the sum assured of the policy, in respect of the basic policy benefit.

b. Terminal Bonus:After declaring reversionary bonuses, if there are still residual profits available in the policy, they are declared as terminal bonus. The value of this bonus is not guaranteed as it is based on the performance of the policy.

c. Interim Bonus: This type of bonus becomes payable when the maturity or death benefit on the policy is claimed between two bonus announcement dates. It ensures that policyholder or  survivorswho claim benefits in the middle of a year will receive due credit for keeping the policy in force for that part of the year.

2.    Safe to invest

A survey by ET Wealth reveals that almost 45% people in India tend to prefer safer havens of investments over a market linked or risky one. Since money back plans are not linked to the market, there is no inherent risk attached to them. A fixed amount is mentioned in the policy along with the payouts based on the money-back plan chosen by you.

3.    Guaranteed income flow

A money-back policy assures a guaranteed income flow at fixed stages during the policy term. You can manage your household expenses, send your child for a reputed college or meet health care expenses of family easily. Money-back policies help you maintain liquidity at the most critical milestones of your life. With these policies, financial commitments will not exert pressure on your regular income and enable you to meet them quite comfortably with a supplementary source of cash in hand.

4.    Facilitates wealth creation

The inherent nature of money-back policies makes them an attractive option for wealth creation. It is like a piggy bank, where you invest in small amounts for a fixed period to receive a huge sum later.  Money-back policies encourage you to invest systematically to build wealth over a period of time.

5.    A good tool for retirement planning

With life expectancy in India going up, an immaculate planning for a comfortable financial future has become an indispensable exercise for every individual.At the end of the policy term, you receive the full maturity amount and an aggregate of accrued bonuses. You can re-invest this amount to earn further returns and support your expenses in the post-retirement stage. Hence, the money back policies double up as goodretirement plans also.

6.    Provides life cover

The insurance component of money-back policies ensures your family’s security even after you are not around. The entire sum assured is paid as the death benefit to the nominee. That too, without the deduction of the survival benefit amount, which was already paid to the policyholder when he was alive.

7.    Gives tax benefits

Like any other insurance policy, money-back policies are eligible for tax deduction under Section 80C. Furthermore,death benefits paid out in case of death policyholder’s death are also exempt from Section 10(10D). The tax benefits along with the returns and life cover make money-back policies a win-win situation for the policyholder. However, do note that the tax benefit would not be available if in any year the premium paid exceeds 20% of the sum assured.

Money back policies are a good investment option for people who are looking for a safe risk-return trade-off along with insurance benefits and periodic cash flows.