MONEY back life insurance policies rank high on the popularity chart. And for good reason: they offer dual benefits of insurance and redemption of money at regular intervals. But little do people realize that they pay more towards premium amount in comparison to a term policy. Here’s a lowdown on what it takes to buy a money back policy and the issues involved.
FIRST THINGS FIRST
According to life insurers, money back policies fit perfectly in the scheme of things of traditional investors who seek financial instruments that provide insurance and investment, with a low risk element and guaranteed returns. In other words, the plan is meant for individuals who require money at certain intervals in their lifetime to meet fixed long and short-term financial needs (buying a house or car, vacations abroad). “Unlike ordinary endowment insurance plans where the survival benefits are payable only at the end of the endowment period, it provides for periodic payments of partial survival benefits during the term of the policy, of course as long as the policy holder is alive.
What makes these products even more attractive is that in the event of death of the policyholder at any time during the policy term, the death benefit is the full sum assured without deducting any of the survival benefit amounts, which may have already been paid as money back components. “Similarly, the bonus is also calculated on the full sum assured.
It is a good safety net for individuals who are in their late 30s or early 40s and are looking at significant payouts after 10-15 years to fund their children’s higher education, marriage and other expenses. It creates a long-term savings opportunity with a reasonable rate of return, especially since the payout is considered exempt from tax except under specified situations.
READ THE FINEPRINT
Before buying a money back plan, insurance advisors recommend that you should carefully check out the actual amount allocated towards the premium, how much of it is going to be accumulated and how much is the insurance company’s charges. The most crucial aspect, they believe, is reading the terms and conditions thoroughly and understanding each clause well.
Also, you should make sure that the periodic payouts are sound enough to meet your anticipated needs. It is also beneficial to analyze the past performance in terms of declared bonuses. Though the past is not necessarily an indication of future performance, it gives a fair idea of the insurance company’s commitment to its policy holders.
Some money back policy provides additional optional benefits such as critical illness benefits, additional term benefit, accidental death benefit and waiver of premium benefit.
Singh points out that an enquiry on the minimum number of years for which the premium is to be paid to keep the policy alive, is also a must check. The tax benefits on the survival benefits may not be available under certain circumstances for example where the premium in any year exceeds 20% of the sum assured. You should watch out for these pitfalls since tax benefits are key to the attractiveness of this policy.
THE FLIPSIDE
One of the primary disadvantages, insurance advisors feel, with money back policies is its low rate of return, when compared to market-linked insurance-cum-investment products. Also, while on the one hand, payout intervals are fixed and helpful for crucial life stage planning, on the other, you don’t have the flexibility to increase or decrease premiums and have a choice of sum assured to suit growing incomes and lifestyle. You don’t have the freedom to change the payout intervals. In case of surrender as well, it offers low paid-up value. For those who like to ascertain the charges of their investment products, it may not be the right choice as it is not disclosed to the policyholder.
MONEY, MONEY
PROTECTED SAVINGS - As the premiums paid are not linked to the capital market
Guaranteed returns
LIQUIDITY - Meet intermittent liquidity requirements at important stages of life stage
LIFE INSURANCE - In case of an eventuality to the insured person
