Ch. 2: Why You Should Invest in Money Back Policy?

In general, the majority of us invest to create a secure cash reserve that would secure us for a comfortable period of time. But, what if you were in need of funds frequently over a period, say to pay EMIs for your new apartment or to fund recurring education fees for your child over say a few years? Are there any plans that can be used to receive regular periodic payouts along with insurance coverage?

Absolutely. Money-Back Plans are here to the rescue.

Money-Back Plan

As discussed in the previous chapter, a money-back plan is a blend of insurance and investment. As the term implies, the money comes back to you as regular payouts at specified intervals. Of course, these plans also have a life cover that secures the family in case of the death of the policyholder.

Let’s have a look at the benefits money-back plans provide -

• Survival Benefit- Survival benefits are payable as per a predefined payment schedule as long as the policyholder survives during the policy term The plan pays a percentage of either the sum assured or the annual premium paid by you in the form of regular payouts.
• Maturity Benefits - Some policies also pay a fixed sum of money on the maturity of the policy. This may be the sum assured and/or the bonuses accrued depending on the policy you have bought.
• Death Benefit - If you pass away during the policy period, the entire sum assured and any accrued bonuses are paid to your nominee, regardless of the survival benefits already paid. Of course, after the death benefit is paid, the policy in most cases will cease, and no further benefits will be paid going forward.

You can read about these benefits in detail in the following article.

You should invest in a Money-Back Plan if -

You want fixed, regular payouts in the future to cover financial goals

It gives you regular payouts to cover financial goals like paying instalments for a new house or car, monthly expenses (rent, bills, etc.), your child’s higher education expenses, etc. These investments are guaranteed² because the returns are a predetermined amount, i.e., a fixed percentage of the sum assured or the annual premium paid, regardless of the market conditions.

You want to invest in low-risk instruments

Some of the recommended strategies for better returns are linked to the equity or debt markets, which although may promise higher returns, are subject to market risks. As opposed to mutual funds and other instruments directly affected by stock market fluctuations, money-back policies offer guaranteed² returns at predefined intervals. If you are someone who prioritises safety of your funds more than its growth, then money back plans could be useful for you.

You want a guaranteed² side income

Passive income and active incomes are necessary due to the ever-rising inflation rates. People who want to have a guaranteed² side income to meet different life requirements should invest in a money-back plan.

Example -

Mr Raj bought a sum assured front money-back policy with a Rs 20,00,000 coverage for a policy term of 30 years in 2015. After a few years, he started getting the survival benefit, say 5% of the sum assured, i.e., Rs 1,00,000 every 2 years after six years of the policy inception. The payouts help him comfortably cover the costs of building a new house on the plot he recently purchased.

You want to secure the financial future of your family

Money-back policies ensure that your family’s finances are secure even in your absence and they don’t have to give up on their goals, dreams, and lifestyles. The lump sum that your nominee will receive as a death benefit can be used to meet long-term expenses. The long-term expenses can be anything, say your child's wedding, spouse’s higher education, paying off loans, etc.

Example :

Maneesh, a 30-year-old male opted for a money-back policy with Rs 30 lakhs coverage for a term of 30 years. He bought a house during the policy duration and took a loan of Rs 20 lakhs for the same. He paid off Rs 10 lakhs of the loan, but unexpectedly died after a few years. His family used the cover amount of Rs 30 lakhs for the remainder of the loan without having to face any financial duress.

You have dependent family members

You may have a family member who needs long-term financial support due to an illness or disability. Money-back policies are perfect long-term cash flow solutions in such situations. The survival benefits can be used to meet the sudden critical needs of your family members. You can perfectly manage your household expenditures using your regular income, and with the help of the survival benefit, you can easily manage your family's necessities.

Example:

Manoj’s father is physically challenged. He needs constant attention and hospitalisation on a regular basis. Keeping this in mind, he purchases a money-back policy of Rs 25 lakhs for a policy period of 30 years. The survival benefit is 5% of the sum assured that shall be paid to him every 2 years after a certain number of years from the policy inception. So, now the survival benefit of Rs 1,25,000 shall assist Manoj in managing his father's long term expenses, thereby providing unparalleled care.

You want to save taxes

Money-back returns are entitled to tax benefits³, resulting in asset security. Financial dependents also benefit from payouts that are exempted from taxation. Both premiums and payouts are exempted from taxation under the Income Tax Act, 1961 -

• Premiums - under Section 80C, up to 1.5 lakhs
• Payouts made to the nominee/you - under Section 10(10D)

The goal of a money-back plan is to establish a fund for growth and prosperity. Regular payouts can help you at crucial points of life, such as your child's education, paying off loans, sudden medical emergencies, etc. At the same time, the policy provides you with insurance coverage. Opt for a money-back policy if you find the benefits and features in tune with your needs.