What Is Money-back Policy? Is It Better Than a Term Plan?

But what's the reasoning behind this? Are money-back life insurance policies truly better than term life insurance policies? Determining the ideal choice can be confusing. This article elucidates what are money-back policies, their benefits and drawbacks, the nature of term insurance, the difference between money-back and term plans, and ultimately, which is better: the Money-back plan or the Term plan.

What Is a Money-back Policy?

A Money-back life insurance policy is a type of endowment plan designed to offer you life coverage for a specific period. Under this plan, you - the policyholder, will receive periodic payouts throughout the policy duration, known as survival benefits. Nonetheless, in the event of an untimely demise before the policy reaches its maturity, the beneficiary (your chosen nominee) will still receive the sum assured, regardless of the survival benefits disbursed to you previously.

Here Are the Key Features of the Money-back Policy:

1. A Money-back policy is a type of endowment plan with life cover for a specific policy term.

2. Upon survival of the specified policy term, the policyholder receives a specific percentage of their sum assured as a survival benefit payout.

3. Once the policy term comes to an end, the final instalment of the payout is disbursed. Generally, these money-back plans also include an additional bonus that accumulates over the policy's term and is given alongside the last instalment.

4. If the individual insured by the policy passes away within the policy term, the entire sum assured, in addition to the accumulated bonuses, is provided to the beneficiaries. The survival benefits already given to the insured person remain unchanged and are not deducted from this total amount.

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[Read: 7 Things to Consider Before Buying a Life Insurance Policy]

[Read: 10 Important Questions to Ask Your Life Insurance Advisor]

[Read: Term Life vs Traditional Life Insurance: Which Is a Better Option?]

[Read: 7 Common Life Insurance Myths Debunked]

[Read: Single Premium Life Insurance vs Regular Premium Life Insurance: Which Is a Better Option?]

What Are the Benefits of a Money-back Policy?

1. Offers Insurance Coverage:

Money-back life insurance plans allow individuals to choose appropriate insurance coverage that safeguards their family's financial security with the utmost peace of mind.

2. Guaranteed Sum Assured:

In the unfortunate event of the policyholder's passing, money-back policies ensure a lump sum payment, serving as the sum assured to the designated nominee. This provision secures the nominee's financial stability. Whereas, if the policyholder survives the policy's tenure, he/she receives periodic survival payouts upon policy maturity. These payouts can be channelled toward achieving their financial goals.

3. Minimal-risk Investment Opportunity:

Money-back plans guarantee returns at regular intervals, positioning them as a low-risk investment avenue. Unlike other investment options, such as stocks and equity mutual funds, money-back plans remain unaffected by market fluctuations.

4. Consistent Income Stream:

Money-back life insurance policies serve as a dependable income source, providing a steady flow of funds at regular intervals.

5. Extra Incentives:

Money-back policies also offer annual bonuses, making the policyholders capable of attaining their financial aspirations. Take note that these bonuses are disbursed solely upon policy maturity.

6. Loan Facility:

A Money-back plan provides the policyholders with the flexibility to avail of a Loan Against a Life Insurance Policy. So, you can borrow funds using your surrender value if and when required.

7. Tax Advantages:

Money-back plans offer tax benefits as per Section 80C of the Income Tax Act of 1961, making them a tax-efficient investment avenue. Furthermore, the sum assured is exempt from taxation as per Section 10(10D) of the Income Tax Act of 1961.

What Are the Drawbacks of a Money-back Policy?

1. Low Returns:

Money-back life insurance policies in India generally yield lower returns compared to alternative investment choices. This is primarily because a fraction of the premium is being allocated for survival benefits. Consequently, the remaining sum allocated for investment purposes is diminished, leading to lower returns.

2. Insufficient Coverage:

Another notable disadvantage associated with money-back life insurance policies is the restricted coverage they offer. These policies might not supply sufficient protection for individuals seeking a more substantial sum assured. Furthermore, the survival benefit payout may fall short of fulfilling the policyholder's financial requirements.

3. High Premium:

Money-back life insurance policies come with elevated premiums in comparison to other variants of life insurance. This cost disparity arises from the inclusion of a survival benefit feature alongside a lump sum payout upon the policy's conclusion. The heightened premium amounts might not be within the means of every policyholder, potentially resulting in financial stress or even discontinuation of the policy after a few years.

What Is a Term Plan?

Term life insurance is a basic life insurance plan that provides financial protection to your loved ones at an affordable premium. The policyholder pays a premium for a chosen term, and if the policyholder dies during that time, the nominee receives the sum assured. Term insurance policy does not offer any survival benefits. Still, many insurance companies now offer riders and add-ons for added benefits that the policyholder can purchase for a slight increase in the premium.

Here Are the Features of the Term Plan:

1. Affordable:

The standout feature of a term plan is its cost-effectiveness. A basic term plan provides life coverage for a predetermined sum, known as the sum assured, and for a predetermined period, termed as the policy term. If the insured person passes away within the policy term, the insurance company disburses the death benefit to the chosen nominee. No maturity benefit is provided if the insured individual survives the policy term. This uncomplicated structure renders the plan economical, given that insurers only have to fulfil death claims.

2. Easy to Buy And Renew:

Much akin to how you engage in convenient online shopping for clothing and household items, purchasing and renewing a term plan follows a similarly straightforward process. Buying a term plan is notably easier in comparison to purchasing other categories of life insurance products or financial tools.

3. Flexibility:

Term plans provide the flexibility to pay premiums on an annual, semi-annual, quarterly, or monthly basis. Some term insurance plans even extend the choice of single-pay or limited-pay premium options in addition to the regular payment option. These adaptable options allow policyholders to select premium payment schedules that align with their financial means and preferences.

What Are the Benefits of a Term Plan?

1. Financial Protection for Your Loved Ones:

In case of your untimely demise during the policy term, the death benefit will be paid to your beneficiary/nominee. They can use this money to cover funeral expenses, pay off debts, or any other financial needs.

2. Affordability:

Term Insurance is typically very affordable, especially when you are young and healthy. The premium remains the same throughout the policy term, making it a wise choice to opt for a longer term.

3. Flexibility:

You can choose the term length that best suits your needs. For instance, if you have young children, it is recommended to opt for a longer term to ensure that the coverage lasts until they are adults. Whereas, if you are nearing retirement, it makes sense to choose a shorter term so that you can save money on premiums.

4. Easy to Understand:

Term Insurance is a simple financial product that is quite easy to understand. You can easily calculate the term insurance premium and coverage you need using the online term insurance calculators available on different financial websites.

5. Riders And Add-ons:

You can add riders and add-ons to customise the coverage to your specific needs. Some of the most popular riders and add-ons are Accidental Death Benefit, Waiver of Premiums, Critical Illness Benefit, Accidental Disability Benefit, Family Income Benefit, Return of Premium Benefit, etc.

6. Tax Benefits:

You can avail of annual term insurance tax benefits of up to Rs 1.5 lakh per financial year under Section 80C of the Income Tax Act 1961 for the life insurance premiums you pay. Besides, if the premium is not more than 10% of the sum assured or the sum assured is at least ten times the premium, Section 10(10D) of the Income Tax Act makes the maturity benefit entirely tax-free.

What Are the Drawbacks of a Term Plan?

1. Absence of Investment Component:

Term plans, in contrast to other extended insurance schemes, lack an investment aspect. These plans solely offer pure protection coverage, and there are no returns provided to the policyholder during their lifetime. However, you should know that the term insurance premium is considerably lower than other insurance-cum-investment plans.

2. No Surrender Value:

Although one of the advantages of a term plan is the immediate termination of the policy upon premium discontinuation, it's crucial to bear in mind that this might not be accompanied by any surrender value.

3. Age-dependent Premium Variation:

While the benefits of term insurance include affordable premiums, these premiums fluctuate with age. This means that the premium charged to you today is significantly lower compared to that payable after another 5 years. However, this can be eliminated by buying a longer policy term.

Money-back Policy vs Term Plan

Here is the difference between a Money-back Policy and a Term Plan:

1. Plan Coverage:

Term Insurance policies do not offer survival benefits to the insured upon surviving the policy term. In the event of the insured person's demise, the nominee will receive the death benefit as compensation.

Money-back policies are considered as assured income schemes. Should the insured individual pass away, the designated family members will receive the assured sum.

2. Other Financial Benefits:

Term Plans are the purest form of life insurance and hence, do not provide any financial assistance or return during the policy's term. Similarly, if the policyholder survives through the policy's term, the insurance company will not offer any financial benefit. However, nowadays, many insurers have started offering term plans that offer "Return of Premium" upon survival of the policy terms. It is important to note that such term plans charge a higher premium compared to regular term plans.

Money-back insurance plans come with an investment component and provide periodic returns, enabling the policyholder to use these funds to meet their family's financial obligations. Furthermore, if the policyholder survives the policy term, the insurer will disburse the sum assured as a payout.

3. Policy Cancellation:

If the policyholder does not pay the premium promptly, a term insurance plan will lapse automatically.

In the case of a money-back insurance plan, you have the option to cancel the policy and get a portion of your invested sum back. However, take note that while the cancellation option is available, you might not get a large chunk of your invested amount back unless you have continued the policy for a longer period.

Which Is Better: the Money-back Policy or the Term Plan?

Buying your first life insurance policy might feel overwhelming initially. However, the effort you invest in comprehending your needs and conducting comprehensive research to identify the most suitable life insurance policy is genuinely rewarding.

While money-back policies may appear initially beneficial due to the "returns" they promise, in reality, the returns and insurance coverage provided by various insurance-cum-investment plans often fall short in light of inflation rates. For example, you might be paying a hefty premium of Rs 1 lakh per annum for a sum assured of just Rs 10 lakh. In short, such insurance-cum-investment plans offer neither sufficient insurance coverage nor adequate returns on the investment.

Furthermore, as discussed earlier, the insurance agents sell these policies as they earn high commissions of up to 40% to 45% on these plans. Besides, as per the IRDAI report, not even 50% of the insurance-cum-investment policies sold in the year survive for the next five years. If you do not continue the policy for a longer period, which is almost the entire premium paying term, you might not get back even what you paid.

Opting for a term plan for your life insurance requirements makes practical sense as it is economical and offers ample life coverage. For example, the premium for a 30-year-old for Rs 50 lakh could be around Rs 6-8 thousand per annum. The money saved on premiums by selecting a term plan can be invested in alternative tax-efficient investment options. For your long-term investment aspirations, rather than investing in a money-back insurance policy or similar insurance-cum-investment plans, it's advisable to channel your resources into well-chosen equity mutual funds. Nonetheless, before investment, ensure thorough research and prudent selection of mutual fund schemes to make an informed decision.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.