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A Beginner-Friendly Guide to Understand Money Back Policy

Money Back Policy A money back policy is a life insurance product that gives the policyholder a percentage of the sum assured at a specified time, rather than waiting a lump sum amount till the end of the policy term. It can also be defined as an endowment plan with an additional benefit of liquidity. The payout received as part of the money back plan is known as a survival benefit that is paid throughout the policy tenure. The remaining amount from the sum assured is paid later, along with vested bonuses.

Survival benefits are paid at a fixed interval, and every plan comes with its unique payout structure. In the same way, the percentage of sum assured to be paid as a survival benefit also varies from plan to plan. As the money back policy reaches maturity, the remaining sum assured (minus the survival benefit already paid) is offered as maturity benefit. However, in case of the policyholder’s demise, the full death benefit is paid regardless of the benefits already paid as survival benefit.

How does money back policy work?

It is one of the best investment options in India because of guaranteed returns on your investment. Let’s understand this with the help of an example.

If person X buys a money back policy for Rs. 5 Lakhs with a tenure of 20 years and makes regular premium payments, he/she will receive a survival benefit of 2% after every 5 years. Upon maturity, the policyholder will receive 20% of the sum assured along with vested bonuses.

Therefore, they receive Rs. 1 lakh after every 5 years and at the end of 15th year would have received Rs. 3 lakh. On maturity, he will receive the remaining Rs. 1 lakh and added bonuses before the plan is terminated.

For example, if X dies in the 15th year of his policy term, the nominee would still receive Rs. 5 lakhs as death benefit plus the bonus, although X has already been paid Rs. 3 lakhs as survival benefit.

Benefit of Money Back Policy

A money back policy offers a wide range of benefits. Let us look at some of these advantages below:

1. Death benefit

If the policyholder dies during the policy term, the insurer will pay the lump sum death benefit to the nominee. Your loved ones can use this amount to stay afloat with financial stability. However, in case they survive the policy term, the insurance provider will pay the survival benefit on maturity. You can use this money to pay for long term goals, such as a retirement fund, buying a dream car, etc.

Money Back Policy 2. Life cover

Even though it is a great investment plan, a money back policy is also a robust life insurance product. You can choose a cover that will be sufficient to help your family live a comfortable life in case of your untimely demise.

3. Low-risk investment

Unlike most market-linked products, such as stocks, bonds, equities, mutual funds, etc., that are vulnerable to market volatility, you get guaranteed returns at fixed intervals with a money back plan. If you prefer to keep the risks low, then these plans will be ideal for you. You can add these plans to your investment portfolio to diversify your investments, including high-risk-high-reward instruments and non-volatile ones.

4. Quick returns

These plans give you a regular source of income at a fixed interval. A money back policy strikes a perfect balance between an endowment plan and life insurance cover to give you financial security and allows you to earn returns soon after investing.

5. Added bonuses

Your money back policy also earns a revisionary bonus after every year. This bonus is paid at the time of policy maturity. Insurance providers also reward loyal customers with a final bonus for staying invested throughout the plan. These bonuses increase your overall payout that can be used to pay for your expenses, long-term goals, such as buying a house.

6. Tax benefits

According to section 80C of the income tax act, the premiums paid towards your money back policy are eligible for tax deductions. However, the premium must be less than 10 percent of the sum assured. Additionally, the maturity benefit paid at the policy’s end is tax-free u/s 10(10D) of the income tax act. If you want to keep your investments low-risk and still earn guaranteed returns with an added safety net of a life insurance cover, then a money back policy is the best investment option for you. What’s more? You can increase your liquidity by saving money on taxes and earning returns at regular intervals. However, to make the best of this plan, it is crucial to buy it from a reliable service provider.

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Any facts, figures or references stated here are made by the author & don't reflect the endorsement of iU at all times unless otherwise drafted by official staff at iU. This article was first published here on 7th January 2022.

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