A Money Back Plan is a type of life insurance plan which offers the dual benefit, i.e., investment & insurance. It offers receipt of returns at a regular span of time during the policy tenure, & offers life coverage providing financial protection in the case of an unfortunate event.
Under the Money Back Policy, a certain amount or percentage of the sum assured is paid back to the policyholder at regular intervals of time. If the policyholder survives the policy tenure, they will get the remaining amount of the sum assured. And, if the policyholder dies during the policy tenure, the full amount of the sum assured is paid back to the nominee, irrespective of the fact that the survival benefits have already been paid.
Advantages of Money Back Plan
Provided are the advantages of a money-back plan:
- Offers sum assured
This plan includes payment of a lump sum amount, i.e. sum assured, to the policyholder’s beneficiaries in the event of their unfortunate demise. This amount helps them meet the future financial obligations, hence providing them with financial stability & mental peace.
- Comes with a low-profile risk
Being unaffected by the market fluctuations, this policy offers lower risk & assured returns at a regular span of time. This ensures the regular receipt of the payout amount irrespective of the market situations.
- Tax savings
The premium amount paid towards the plan is eligible for a tax deduction u/s 80C of the Income Tax Act, 1961. Additionally, the maturity benefits received are exempt from tax u/s 10(10D) of the Income Tax Act, 1961.
- Receive returns in a few years of investment.
This plan is just like an endowment plan, which provides returns in a very short span of time. This means money-back plan offers a regular stream of income as a percentage of the sum assured after investing, usually after the 3rd, 4th or 5th year.
- Additional benefit
A money-back plan offers some additional advantages, i.e. guaranteed add-ons.
- Maturity benefit
Along with regular payouts received, i.e. with a survival benefits policyholders also get maturity benefits at the end of the maturity of the plan. This includes declared bonuses, which depend on whether the policyholder survives the policy tenure or not.
Disadvantages of Money Back Plan
Provided are the disadvantages of a money-back plan:
- Lower returns
This includes lower returns in comparison to other investment plans. This is because a part of the premium gets accumulated to build a corpus towards survival benefits, resulting in lower investments & returns.
- High Premium
This plan includes higher premium costs in comparison to a term life insurance plan. This is because it includes both survival & maturity benefits.
- Limited coverage
This plan offers limited coverage, i.e. policyholder does not enjoy a high amount of sum assured. Also, the survival benefits received are insufficient according to the financial needs of the policyholder.
- Inflation risk
This plan does not keep up with inflation, which means the payouts may not rise with inflation. The payouts remain the same, with policyholder finding it difficult to meet their financial objectives in case the cost of living rises. This leads to lower purchasing capacity, resulting in lower value of returns.
- Lack of Flexibility
This plan does not offer flexibility when compared with other life insurance plans, making it difficult to make modifications or cancel the plan.
- Opportunity Cost
Though the regular payouts are sufficient but if invested elsewhere, they may earn better returns. Hence, these plans offer limited returns when compared to other investment options.
- Insufficient Insurance Component
Under this plan, the sum assured offered is not enough when compared to other term plans to meet future financial obligations. This may be a concerning point for those policyholders looking for a secure & better financial future for their family members.
How to Choose the Best Money Back Plan?
Some individuals may consider a money-back plan as one of the Best Savings plans, especially those who prefer assured returns with insurance & regular payouts. But choosing one requires consideration of certain factors, which are mentioned below:
- Monetary Goals
This plan is considered to be appropriate for both short-term & long-term financial objectives. The regular payouts received under this plan provide financial support to the family members throughout the policy tenure. Hence, before purchasing a plan, consider the short-term & long-term financial objectives, which may include purchasing of house, a child’s education, planning a vacation, etc.
- Sum Assured
The amount of sum assured is a fixed amount to be received by the beneficiaries in case of the sudden demise of the insured. The amount of sum assured can be calculated by considering certain factors, such as current expenses, present lifestyle, standard of living of your family, etc. Also, the coverage amount should be enough to meet the current & long-term requirements of your family members. Choose a reasonable amount of sum assured, as a higher amount may increase the amount of sum assured.
- Duration of Policy
The longer the policy tenure, the lower the premium amount would be. Also, the maximum tenure will depend on the age of the insured.
- Policy Premium
The amount of premium should be such that it offers considerable coverage along with returns to meet the future financial obligations. Also, one should consider their budget, which ensures the affordability of the plan.
- Riders
The appropriate riders must be chosen well in advance, as they are not included in the plan. The choice of riders should meet your financial requirements & budget.
- Claim Settlement Ratio
It means the percentage of total claims settled out of the total claims received during a financial year. The higher the claim settlement ratio, the higher the chances are that claims will be settled in an efficient & prompt manner.
Conclusion
Although there are multiple investment options available, all the options have their own advantages & disadvantages. However, when it comes to choosing the best savings plan that provides both coverage & returns, the choice should depend on the financial objectives, investment criteria, & risk tolerance. You may also consult a financial advisor to receive customised advice tailored to your specific needs.