A money back plan is one of the best life insurance policies for an individual looking for a guaranteed money return policy. These policies also work out well as the backup policy for aggressive investors who prefer to use the stock and commodities market to increase their wealth. Moreover, the fact that these policies also offer a guaranteed payout after a few years of investment means that they are offering much better returns than the standard life insurance policies which only pay when the policy matures. These policies also work well as a standard insurance cover. The nominees receive the money from the sum assured in case the unfortunate comes to pass.
Returns Accrue Only After a Few Years
The best thing about a money back plan is that the returns accrue only after a few years of investment. In case of long term policies of say 15 or 20 years, the amount is paid every few years and adds up to a tidy sum. In addition, the rest of the benefits are paid on the maturity of the policy. The insurance companies provide this benefit in a two stage process. The first stage comprises of the amounts that are paid every few years. The first and the last payout periods are generally spread evenly over the life of the policy. This means that if you buy a policy of say 18 years, the survival benefits may be paid to you every three years starting from the sixth year to the fifteenth.
The second stage comprises of the final payout that is larger than each of the previous payouts and given at the time of maturity of the policy with the maturity amount. Investors should note that survival benefits are paid only if the insured party continues to live. In the case of any unfortunate event that leads to the passing away of the insured party whether by accident or otherwise, then the survival benefits do not accrue and the nominees only receive the sum assured plus any bonus amount.
Value of Money Higher with a Money Back Policy
Many sceptics counter that money back plans do not offer nearly as good returns as investment plans. However, they are generally missing the point of a money back policy. The thing to remember for people is that it is an insurance cover (one that pays back money over the lifetime of the policy but an insurance cover, nonetheless) and is not a pure play investment plan. The insured party receives three-way payouts – the survival benefits, the sum assured on maturity and the bonus. Leaving all things aside the real value of the survival benefits are likely to tilt the scales in favour of money back plans. If you are wondering why, it’s because the value of money decreases over time. This means that what Rs. 100 will buy you today, it will not do so 2-3 years down the line. Let’s try to clarify this further with an example.
Suppose you are having a meal at a restaurant or watching a movie at a place where you are regular over the last 4-5 years. If you think back, you will remember that your favourite dish in the restaurant or the bag of popcorn you are munching on used to cost less two years back. It may have been Rs. 10-20 cheaper but it was definitely less costly than before. This means that if you are paying Rs. 100 now for the meal or popcorn, you probably paid Rs. 80, Rs. 90 or even less two years ago. Approaching it from a different perspective, what this means is that Rs. 80 or 90 is now no longer paying for the same amount of food as it used to two years ago. You will receive a lesser amount of food if you pay Rs. 80 or Rs. 90.This is commonly known as reducing value of money. Applying this logic to a money back policy of say 20 years means that the payout you receive in the fifth, tenth or fifteenth year (say) is worth more than if you have received it at the end of the policy tenure.
Insured Receives the Full Sum Assured on Maturity
A money back plan provides the full sum assured on maturity. This is irrespective of the survival benefits and the amount paid under the same. This works just like any standard life insurance policy where the insured party gets a final assured sum at the end of the policy term. The money back policy is a good way to get more than just the maturity amount as in addition to it, the insured also keep receiving the survival benefits over the term of the policy. This is in addition to the bonus they receive at the end of the plan period.
If you are contemplating whether to go for an endowment plan, a money back policy or a term plan, it may be best for you to understand what you are looking for. If you only want a cover and are fine with not receiving any money back at the end of the period, then the term plans may be best for you. If you are looking for a plan that only pays at the end of the policy period and you do not need any money back during the term of the policy, then the endowment plans work well. If you need a cover, sum assured at the end of the policy and returns after every few years, then the money back plans are what you should put your money in.
Insurance Cover at the Same Time as Investment Returns
Though there are many other investment plans in the market that give returns at the end of the investment period or in some cases, over the lifetime of the policy, only a money back plan offers the triple advantage of maturity benefits, survival benefits and insurance cover. In fact, with these policies, the advantage is actually four-fold as you also receive a bonus that results in a significant increase in the overall payouts received from the money back plan. Most plans offer insurance benefits only and a limited return, while others like ULIP - Unit Linked Insurance Plans offer a smaller cover and larger (and riskier) market linked returns. In between these two options, money back plans provide an ideal platform for the risk adverse investor to get an insurance cover and also receive significant guaranteed returns.
Bonus at Maturity Significantly Increases the Overall Payout
The revisionary bonus at the maturity of a money back policy helps to increase the payout from the policy by a significant amount. The reversionary bonus is declared every year on the sum assured. Most money back plans offer a simple reversionary bonus that is declared at the end of a year and gets added to the overall bonus that the insured receives at the end of the policy period. In addition to the simple bonus, there is another form of reversionary bonus called compound reversionary bonus wherein the bonus of the previous year is added to the sum assured and the bonus in the next year is given on this new increased sum assured amount.
Another form of bonus that may be declared and given by the company to the policyholder at the end of the policy period is the final additional bonus. This money is more in the form of a reward to the insured for sticking with the policy for such a long period. Both these types of bonuses help to increase the overall payout received by the policyholder of the money back plan.
Counters Vitality of Market-Linked Investments
The returns from the stock and commodities markets are highly volatile with even the best investments not being safe from the vagaries of the market. Any person who uses the stock market, whether directly buying the equities and commodities by themselves or relying on mutual funds, will be able to safeguard at least a part of their money using a money back plan or two.
A money back policy should be a part of the portfolio of any individual. It guards against loss of income from other investments due to the guaranteed nature of the returns. The insured party receives not only a definite return of the investment amount but also an insurance cover that ensures his nominees receive the sum assured to carry on with their lives in case the unfortunate happens. In addition, the survival benefit is the true plus point for money back plans. These benefit can be used to pay off expenses in various stages of life or even make investments. The money can be used to pay off loans, buy a house or real estate, invest in fixed deposits and so on.
Secure Investments with a Money Back Plan
A money back policy is a good way to plan secure investments. Since the returns are guaranteed, they make an ideal investment vehicle and ensure the investor gets his or her money back in a worry free manner. If used in tandem with stock market investments, like mutual funds, a money back policy can help reduce the risks of the investor’s overall portfolio. Moreover, the money back plan helps to guard against any risk to certain funds that are definitely needed in the future.
For instance, it is a fact that children after passing out from school need to go to a good college to get a shot at a secure career. College education is costly and can make quite a dent in the parent’s savings. In fact, the burden is more if the child opts for engineering, medicine or business administration, among others. A foreign education further increases this need for funds. All this can be taken care of easily if the parents opt for a money back policy when the child is still young. The survival benefit payments after every few years will take care of all these fund requirements without any significant impact on the parents’ savings, if at all.
Tax Savings with a Money Back Plan
All life insurance premium paid under a money back policy qualifies for tax deductions under section 80C of the Indian Income Tax Act, up to the specified limit, as long as the premium is less than 10% of the sum assured. This means that policyholders can reduce their tax liability by opting for a money back plan. Moreover, the maturity amount is exempt from tax deduction at source as long as the sum assured is more than five times the premium paid for the policies. People who are looking for safe guaranteed returns can use this tax benefit to further increase their money as they will now also save on tax in addition to getting the survival benefits, sum assured on maturity as well the bonus from the insurance company.