Ch. 13: Money-back Plan - How does it work?

You are now aware that a money-back plan offers the dual benefits of investment and insurance. In addition to a life cover, it also provides a guaranteed1 return on your investment with regular payouts at specific intervals. Sounds amazing, doesn’t it?

But but but…

Before you go ahead and invest in a money-back policy, it is extremely important to understand how it works - so that you don’t face any hassles before or after the policy is purchased.

Let’s dive right in!

How does a Money back plan work?

1. Clearly define your goal Before you jump in to buy a Money-back plan, you need to clearly define the financial goal the investment will help you achieve. Ensure you factor an inflation of at least 6-8% when you calculate the payouts you will need in the future. Ensure you also calculate and know the Internal Rate of Return the investment will generate, probably with the help of a financial advisor.

2. Deciding how much you can invest over the minimum payment term Money-back policies are more of an investment product, than insurance. You need to first figure out how much you can invest over the minimum payment term. For instance, if you are buying a money-back plan that requires you to invest for a minimum of 10 years, you should figure out the premium amount that you can comfortably afford to pay in these 10 years.

3. Understand the commitment In money-back plans you not only commit yourself to a certain payment for a fixed duration of time, but you also commit to lock in the entire corpus for a certain duration of time. You need to understand this well that you won’t be able to withdraw money without significantly large losses to the fund you have accumulated.

4. Participating vs. Non-participating Money-back policy Under a Participating Money-back policy, along with the fixed benefits, you will also receive bonuses, i.e., a share of the profit the insurance company earns from the money they invest in various financial instruments.

A Non-participating Money-back policy, on the other hand, is a plain and simple policy. There are no bonuses payable under this plan - the insurance company will only pay the survival, maturity, and death benefit. You will receive loyalty additions, guaranteed² additions, etc.

So, if you want to receive bonuses along with other benefits payable under the Money-back plan, choose a Participating Money-back plan. If bonuses don’t excite you, then you can buy a Non-participating Money-back policy.

Please note that bonuses aren’t guaranteed² and will differ with each product and insurance company.

5. Customising the policy A. Limited Pay Normally, you’re required to pay your premiums until the end of the policy tenure. With the limited pay option, you can finish paying your policy premiums early in faster, and larger instalments - and enjoy the cover for the rest of the policy duration.

For instance, say Bhavi buys a Money-back plan worth Rs. 50,00,000 for a duration of 30 years. Generally, she’ll have to pay the premiums for the next 30 years. However, if she chooses the limited pay premium option at the time of buying the policy, she can finish all her premium payments in the next, say 10, 15 or 20 years - and get the premium paying liability off her chest quickly.

B. Different Benefit Payout Options This is the period wherein you receive the survival benefit. It is determined by the policy schedule. Depending on the plan, you may have the option to receive the payouts -

• after the premium payment period gets over, or
• a few years after the commencement of the policy term, or
• after the policy term ends

The benefit payout period can generally range from 5-30 years, depending on the product.

C. Benefit Payout frequency You can choose the frequency of receiving the payouts. This can be monthly, quarterly, half-annually, annually etc.

D. Premium Payment frequency The premiums, based on your convenience, can be paid on an annual, half-yearly, quarterly, or monthly basis. They will vary accordingly.

E. Deferred period This is the period between the end of the premium payment term and the beginning of the benefit payout period. That means - the time span when the customer has already paid all the premiums for the policy, and the insurer has not begun giving payouts. The deferred period may vary depending on the product.

F. Increasing Survival Benefit option Some policies may give you the option of increasing the survival benefit on an yearly basis, say, 5% per year - throughout the benefit payout period.

G. Riders Most Money-back policies also allow you to opt for riders at an additional premium amount. Riders are easy-to-buy add-ons through which you can access additional benefits under special circumstances.

For instance, a critical illness rider will offer an additional payout if you’re diagnosed with a serious disease listed in the policy document. Or an accidental death benefit rider will pay an additional sum of money to your nominee if your death happens because of an accident.

Some riders available with money-back plans include -

• Critical Illness Benefit Rider
• Accidental Death Benefit Rider
• Accidental Disability Rider
• Waiver of Premium on Critical Illness Rider
• Waiver of Premium on Accidental Disability Rider
• Surgical Care Rider
• Hospital Care Rider

Please note: There can be other types of riders available with money-back plans, depending on the insurer and the plan you choose. So, ensure you check the relevant policy documents so you’re well-informed before making the purchase.

6. Paying the premium Based on the type of policy you buy, the cover amount you choose, the riders you opt for, the premium paying option you select (limited pay or regular pay), etc. the insurance company will calculate the premium amount. This happens in case of sum assured front policies.

Some products may also give you the option of choosing the premium amount. The sum assured will then be calculated accordingly.

And then, once the insurer approves your policy application, you will have to pay the premium regularly to keep your policy active.

7. Renewing the policy every year If you don’t pay your premiums on time or miss even one premium payment, there’s a chance of your policy lapsing - where all benefits under your policy will cease. Hence, ensure you pay your premiums regularly, before the due date.

You can choose an e-SI (electronic standing instruction) option at the time of policy purchase to streamline this. With this option, your premiums will be transferred to the insurance company directly, and on time.

If you fail to pay the premiums for two years and don’t renew the policy, the policy becomes a reduced paid-up policy. You might face significant losses as the benefits will reduce.

8. Understanding the benefits payable under a Money back plan Three types of benefits are payable under Money-back plans - the death benefit, maturity benefit, and survival benefits.

• Survival benefit - paid at specific intervals as per the policy schedule.
• Maturity benefit - paid on the maturity of the policy.
• Death benefit - paid if the policyholder passes away when the policy is active.

Let’s understand how these benefits work in detail.

A. Survival benefits As long as all the premiums are paid on time and you survive the policy term, you’ll get a specific percentage of either the annual premium or the sum assured back as per the policy schedule. This is called the survival benefit.

Example 1: Say you buy a Money-back policy of Rs. 10 Lakhs for 15 years, where you will get 25% of the sum assured every 5 years as a survival benefit. This means a survival benefit of Rs. 2,50,000 will be payable under your policy.

Example 2: Your friend buys a Money-back policy of Rs. 10 Lakhs and pays a yearly premium of Rs. 1 Lakh. Under the policy, he will get back 10% of the premium he pays every year as a survival benefit. Meaning, the survival benefit payable under your friend’s policy will be Rs. 10,000.

B. Maturity benefit If you outlive the policy term, the insurance company will pay a maturity benefit that may include the sum assured along with any accrued bonuses, just the bonuses, or even the survival benefit in the form of periodic payouts. This differs from policy to policy.

Example: You buy a Participating Money-back policy worth Rs. 30,00,000. Say the maturity benefit payable under the policy will include the sum assured and bonus.

So, at certain intervals, you will get the survival benefits as specified under the policy. Then, if you survive the policy term, you will receive a maturity benefit of Rs. 30,00,000 and any bonuses accrued under the plan - and then the plan will terminate.

C. Death benefit In case you pass away while the policy is active, your nominee will receive the death benefit that will include -

• Sum assured you choose at the time of buying the policy.
• Any bonuses accumulated under the policy.

Please note, the sum assured that your nominee will receive will be exclusive of the survival benefits paid to you during the policy tenure.

Example: You buy a Participating Money-back policy worth Rs. 50,00,000 for 25 years. The survival benefit is a percentage of the sum assured and you have already received the survival benefits of Rs. 30,00,000 in the 5th, 10th, and 15th years. Now, say you pass away during the 18th year. In this case, irrespective of the survival benefits paid to you, your nominee will get the death benefit of Rs. 50,00,000 and any bonuses accrued under the policy - and then the policy will end.

Please note, the amount payable under each of these benefits will vary from insurer to insurer. So, ensure you check the policy wordings and brochures, before going ahead.

9. Discontinuing the policy If for some reason, you want to discontinue the policy you’ve purchased or are unable to pay the premiums, you can surrender it. If you decide to surrender your Money-back plan, you will receive a surrender value. For this, however, the insurance company may ask you to pay the policy premiums for at least two to three years.

Example of Money Back Policy

Let’s understand in detail how a money-back plan works with Rishabh’s example.

Rishabh, aged 30 years, buys a participating Money-back policy for a sum assured of Rs. 50,00,000 in 2020. He buys the policy for a duration of 25 years - meaning, his policy will end in 2045.

Under this policy -

• Rishabh will get 20% of the sum assured as a survival benefit every 5 years.
• If he outlives the term, the insurer will pay him the sum assured along with any bonuses accumulated as the maturity benefit.
• And if he passes away while the policy is active, his nominee will get the death benefit.

Let’s see how much benefits will be paid out under the policy, in the following two scenarios -

1. Rishabh survives the policy term.
2. Rishabh passes away while the policy is active.

SCENARIO 1: RISHABH SURVIVES THE POLICY TERM If Rishabh survives until the end of the term, here’s how the survival and maturity benefits will be paid out under his policy.

Survival benefit payout will be as follows: (The survival benefit will be paid to Rishabh every 5 years.) Payable survival benefit = 20% of sum assured = 20% of 50,00,000 = 10,00,000

This will be paid on an annual basis in the following manner -

Years in which the survival benefit will be paid	How much survival benefit will be paid
2025	Rs. 10,00,000
2030	Rs. 10,00,000
2035	Rs. 10,00,000
2040	Rs. 10,00,000

Total survival benefits Rishabh will receive: Rs. 40,00,000 (The maturity benefit will be paid to Rishabh in the year 2045.)

Sum assured	Rs. 50,00,000
Bonus	As accrued under the policy.

Total maturity benefit Rishabh will receive: Rs. 50,00,000 + Any bonus accumulated under the policy.

SCENARIO 2: RISHABH PASSES AWAY WHILE THE POLICY IS ACTIVE Say Rishabh passes away in the year 2038. Here’s how the survival and death benefits under the policy will be paid out.

Survival benefit payout will be as follows: (The survival benefit will be paid to Rishabh every 5 years.)

Years in which the survival benefit will be paid	How much survival benefit will be paid
2025	Rs. 10,00,000
2030	Rs. 10,00,000
2035	Rs. 10,00,000

Total survival benefit Rishabh will receive: Rs. 30,00,000

Death benefit payout will be as follows: (The death benefit will be paid to Rishabh’s nominee in 2038 - the year in which Rishabh passes away.)

Sum assured	Rs. 50,00,000
Bonus	As accrued under the policy.

Total death benefit Rishabh’s nominee will receive: Rs. 50,00,000 + Any bonus accumulated under the policy.

This brings us to the end of the article. Now that you’ve understood how a Money-back policy works, we’re sure you won’t face any hiccups before or after investing in it.