Money-back policy is a perfect example of an insurance plan that offers both insurance and investment. It is a policy that is popular with insurance-seekers who are looking for financial security as well as life cover. Main thing it covers is regular payouts, maturity amount and bonuses.
How Money Back Policy Works
Money-back plans make regular payouts in installments instead of only a lump sum amount on maturity. It is like an endowment plan but without liquidity. The payouts, referred to as survival benefits, start a few years after you buy the policy and continue till maturity subject to the survival of the insured.
In case of death of the policyholder, survival benefits stop and the entire maturity amount is paid to the nominee along with bonuses, if any. It provides life coverage during the term of the policy.
Money-back plans come with different payout intervals but usually it is every five years and the amount is calculated as a percentage of the sum assured, generally about 20%.
Bonuses
Money-back plans have two types of bonuses – reversionary and additional. These are calculated on the full amount insured. Revisionary is given every year and calculated on a percentage of the sum assured. It keeps accumulating every year and is added to the maturity amount or given to the nominee in the event of the death of insured.
Additional bonus is optional and depends on performance of the insurer. It also depends if the policyholder has been a good customer paying all premiums on time.
Pros of money-back policies
Guaranteed returns along with life cover.
Less risky unlike market-linked plans which are subject to volatility.
In case of policyholder’s death, claim of full sum assured is paid. Survival benefits already paid are not deducted from sum assured.
Survival benefits act like a second source of income. Can be used to pay off loans, children’s tuition fees or take a holiday.
Guaranteed returns ensure the well being of the family in case of the death of policyholder.
Death benefits include the sum assured as well as bonuses accrued on the policy since the time of buying.
Money-back policies are preferred by a conservative buyer because of the guaranteed returns but market-linked plans are more exciting because they are riskier but more profitable.
Cons of money-back policies
It is not a full-fledged investment option so will not give the same level of returns as market-linked plans.
Unit Linked Investment Policies (ULIPs) are preferred over money-back plans these days because they generate better returns.
The sum assured is five times the premium paid. Whereas returns in money-back policies are fixed.
Money-back plans are invested in government debt securities, so yields are lower.
Plus insurance cost is deducted from the premium which further lowers the amount for investing in the hands of the insurer.
Premiums are higher than a term insurance plan; almost around 25 times higher.
Withdrawals are permitted only after five years while ULIPs have flexibility of withdrawal.
Not very beneficial if kept for long-term whereas ULIPs are meant for the long-term.
Money-back plans have rigid rules regarding surrender which is expensive.