Yes. Money back policy is a safe investment since it does not invest in market. It offers guaranteed sum assured and guaranteed survival benefits. Bonus is an addition over and above the guaranteed returns.
Everything about a Money Back Life Insurance Plan
In today’s world, where living standards and inflation both are increasing at unprecedented levels, not only financial security but liquidity is also of utmost importance to meet the regular life goals.
It's a blessing to have an investment that not only provides financial coverage to help your dependents in case of your unforeseen demise, but also helps to meet other financial needs.
Money Back Plans not only assures financial protection to your dependents but also offer guaranteed returns at regular intervals during the policy term.
What is a Money Back Policy?
A Money Back Policy is a kind of insurance plan that provides the dual benefits of insurance and investment. In this, the policyholder is paid back a predetermined percentage of sum assured at regular intervals. These payouts are known as survival benefits. On maturity, the balance sum assured along with any additional bonus is paid to the policyholder, thus, the term Money Back.
In case of unfortunate demise of the policyholder during the policy term, complete sum assured is paid to the nominee, regardless of all the survival benefits paid earlier.
Now that we know what a Money Back Policy is, let's see who should buy it.
Who Should Buy a Money Back Policy?
Money Back Policy should be opted by people who:
- Want to keep their investments liquid and receive regular income rather than keeping it locked in the complete policy term.
- Want to save for a specific long-term goal, especially periodic goals like your child’s high school education, graduation and then higher studies. The survival benefits make sure that the periodic corpus requirements are met.
- Want to have a financial protection for their family so that even in case of their untimely demise, the family’s financial requirements are met.
Types of Money Back Policies
1. Participating Money Back PlanA participating policy participates in the company’s profits from their investment of participating funds, that are then distributed as bonus or dividend. Thus, in addition to the guaranteed death and maturity benefits, these policies also provide non-guaranteed bonuses and dividends based on the company’s performance.
2. Non-Participating Money Back PlanNon-Participating Money Back Plans, on the other hand do not participate in the company’s profits so there is no share in the profits earned by the insurer. Hence, the policyholders receive only the guaranteed death and maturity benefits. There are no bonus or dividends paid.
Features of Money Back Policy
1. Death BenefitIn the unfortunate event of the policyholder’s demise, the nominee is paid the complete sum assured of the policy, as death benefit, irrespective of the amount already paid as survival benefits.
2. Survival BenefitsThe policyholder is provided a predetermined percentage of sum assured at regular intervals during the policy term. These payouts are known as survival benefits.
3. Maturity Benefit
- In case of Non-Par Policies: If the policyholder survives the complete policy term, they are paid the balance sum assured, after deducting the amount already paid as survival benefits.
- In case of Par Policies: The additional bonuses declared by the insurer in case of par policies are also added to the maturity amount in addition to the balance sum assured.
4. BonusParticipating money back policies provide bonuses that are declared by the insurer as a share of their profits from investment of their participating funds. These bonuses are added to the sum assured and paid to the policyholder on maturity.
5. Surrender ValueMoney Back Policy provides a surrender value in case you decide to discontinue your policy before the completion of term. Although at times, the surrender value is less than the total premium paid, you can be assured to receive at least a portion of your investment in case of emergencies when you cannot complete the term of policy.
Benefits of Money Back Policy
The most common benefits of a money back policy are as follows:
1. Regular Income
The survival benefit in money back plans provide periodic payouts that can serve as regular source of income, particularly useful to meet short term financial goals.
2. Goal Based Savings
We all have some financial goals that fall at different stages of life like buying a house, child’s higher education, a dream vacation or a relaxing retirement. With a money back policy, you get payouts at regular intervals that can help you meet these goals.
3. Financial Protection for Family
In the unfortunate event of the death of the insured, a money back policy pays 100% sum assured to the beneficiary as death benefit, thus providing a crucial safety net. This ensures that loved ones are financially secure, even in the face of unexpected circumstances.
4. Guaranteed Returns
Money back plans offer guaranteed returns in the form of sum assured or the periodic payouts that are a fixed percentage of the sum assured. In addition, the non-guaranteed bonuses, in the case of participating plans, are an extra benefit. Thus, they are an appropriate choice for investors seeking a reliable and steady income flow.
5. Tax Benefits
Money-back plans offer tax benefits under Section 80C of the Income Tax Act for the premiums paid, up to a specified limit. The maturity amount, the survival benefits and the death benefit received, including bonuses, is tax-exempt under Section 10(10D) as per the prevailing tax laws.
How Does a Money Back Policy Work?
Now that you’ve done your research, determined your requirements, checked the available plans and analysed them according to your requirements, buy a policy that is most aligned with your requirements and future goals.
Next, that you have bought the policy, lets understand its working in the following steps:
- Pay Regular Premium: Premiums are paid at regular intervals as per the frequency (monthly, quarterly, or annually) and the type (limited or regular premium), as chosen by you.
- Growth Period: During the policy term, while a portion of the premium goes towards building your insurance cover, the other portion is allocated towards investments for corpus building by the insurance company.
- Survival Benefits: At predefined intervals, the policyholder receives a percentage of the sum assured as ‘survival benefits.’ These payouts provide liquidity and financial support for regular life requirements.
- Maturity Benefit: On the completion of the policy term, if the policyholder has survived the entire term, they receive the balance sum assured as a maturity benefit. If it's a participating policy, they also receive bonuses.
- Death Benefit: In the case of unfortunate death of the policyholder during the policy term, the nominee receives the complete sum assured, regardless of the survival benefits already paid, thus ensuring financial security for the dependent family.
This is the fundamental working of a money-back policy, that offers a combination of insurance protection and periodic returns, thus ensuring financial security for the family, and at the same time, aiding in corpus building for life goals.
Let’s see an example to see the working of a Money Back Policy. Mr. Ravi has purchased a non-participating money back policy with a sum assured of ₹10,00,000, a policy term of 20 years and 20% survival benefits paid every 5 years.
Case 1: Mr. Ravi receives ₹ 2,00,000 each (20% of sum assured) on the 5th, 10th and 15th year. On the 20th year, the balance sum of ₹ 4,00,000 is paid as maturity benefit
Case 2: Mr. Ravi receives ₹ 2,00,000 each on the 5th and the 10th year. In the 12th year, Mr. Ravi loses his life in an unfortunate road accident. In this case, his nominee receives ₹ 10,00,000 as death benefit.
Types of Bonuses in Money Back Plans
In a participating money back plan, the insurance company invests its assets, the premiums accumulated from the policyholders across different financial instruments and grows the corpus. The profit earned from these investments is then shared with the policyholders in the form of bonus.
Since the profitability is not guaranteed and keeps changing, the bonuses are also the non-guaranteed component. Bonus also depends on a few other factors like the kind of policy you have chosen, the tenure of your policy etc.
Majorly, there are three types of bonuses in a participating money back policy:
1. Reversionary BonusThis type of bonus is declared periodically or at the end of each financial year, as a percentage of the sum assured. However, it is not paid immediately and becomes a part of the guaranteed benefits of the policy. It is paid either to the nominee at the time of death claim or to the policy holder, on maturity of the policy.
2. Terminal BonusTerminal Bonus is paid by the insurer as a recognition of your regular premium payment and continuation of the policy. It is paid along with either the maturity benefit or the death benefit. However, this bonus depends on the discretion of your insurer and is non-guaranteed.
3. Cash Bonus
Cash bonus in money back insurance plans is periodic payout that policyholders receive during the policy term. It is determined as a percentage of the annual premium and is paid to the policyholder at the end of each financial year.
It is calculated as:
Cash Bonus = Annual Premium Amount X Cash Bonus Percentage.
These payouts provide policyholders with liquidity and financial flexibility, allowing them to meet various financial needs or reinvest the funds.
Common Riders Available in a Money Back Policy
Riders are the additional benefits that can be added to your base policy, for a small extra premium, to enhance the coverage and offer customised benefits.
Some of the most common riders available with the money back policies are:
1. Critical Illness Rider
The Critical Illness Rider provides an additional payout if the policyholder is diagnosed with a specified critical illness during the policy term. Thus, it helps cover the medical expenses and other financial obligations that may arise due to a critical illness.
Some of the common critical illnesses covered under this rider are heart ailments, cancer, stroke, organ transplants, etc. For the complete list of critical illnesses, you should refer your policy document.
2. Accidental Death Benefit RiderThe Accidental Death Benefit Rider offers payout in case of an accident. It enhances the death benefit, providing additional financial support to the policyholder's dependents in such unfortunate events.
3. Waiver of Premium RiderWith the Waiver of Premium Rider, if the policyholder becomes disabled or seriously ill and unable to pay premiums, the insurance company waives the premiums for the base policy. This ensures that the policy remains in force, and the coverage continues even in such unfortunate times of disability or illness.
4. Accelerated Death BenefitThe Accelerated Death Benefit rider allows the policyholder to receive a portion of the death benefit in advance if they are diagnosed with a terminal illness. This can help cover medical expenses and improve the quality of life during a difficult time.
5. Hospital Cash BenefitHospital stays require many expenses on a a daily basis. The Hospital Cash Benefit Rider provides a daily cash to the policyholder if they are hospitalized due to an illness or accident. This payout can be used to cover additional expenses associated with hospitalization, such as transportation, meals, and other incidental costs.
Factors to Consider While Buying a Money Back Policy
1. Financial GoalsDetermine your financial goals that you want to fulfil with the money back policy. Whether it's about disciplined savings, corpus building for a certain goal, insurance coverage, or regular income, if we are clear with our goals and expectations from our policy, we can choose a plan that is aligned with our goals.
2. CoverageDetermine the amount of coverage you need. It depends on a lot of factors, the most important being your income, savings, liabilities, family lifestyle and future financial goals. Selecting an appropriate coverage makes sure your family is completely protected financially in case of your unfortunate demise.
3. Policy TermOnce you have determined your goals, policy term is another major factor that you need to consider. Your goals must align with your policy term. Thus, if it's for a goal like child education or regular income post-retirement, the term of your policy should match with the timeline, so that you have funds available when they are needed.
4. FeaturesUnderstand the features of your policy thoroughly. Know the bonus that the policy offers, the riders available, the claim process, inclusions, exclusions, the range of sum assured offered and other features. Knowing what features your policy provides and how it works, helps you to reap the optimum benefits and have your expectations aligned.
5. Survival BenefitCheck the survival benefit paid in your policy. The amount and the frequency of payment. Choose a policy where the survival benefits payment and amount are in synch with your goals. Hence, plan your policy in a way that you receive funds when you need them for fulfilling your financial goals.
Frequently Asked Questions
If you miss to pay your premium in time, most companies provide a grace period of normally 30 days for annual premium paid policies. If you don’t pay your premium even during the grace period, the policy lapses. You can then reinstate the policy depending on your policy’s terms and conditions.
Yes, you can change the nominee in your money back policy by submitting the required documents.
A money back policy is a good investment if:
- You are looking for a dual advantage of insurance and investment.
- You are a risk averse investor looking for guaranteed returns.
- You want regular guaranteed payouts to meet certain financial goals.
If you fall in any of the above categories, a money back policy can be a good investment for you.
Yes, you can nominate multiple individuals, specifying the percentage of the payout each should receive.
Yes. You can change the nomination by submitting the required documents.
Surrendering a money back policy before maturity may result in reduced payouts or financial penalties.
Money Back Policies offer life coverage with periodic payouts and guaranteed returns. Though they are a safe investment, they may not provide the same returns as pure investment instruments.
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.