Ch. 15: Difference Between Endowment Plans and Money-Back Plan

When you set out to buy a life insurance plan that offers both insurance and investment components, you will come across many variants. Two of the most popular ones you will find are - an Endowment Plan and a Money-back Plan.

In this article, let’s understand how both these plans work, the differences and similarities between them, and more.

Let’s dive right in!

An endowment plan is a life insurance plan with a blend of insurance and investment. It helps you accumulate a savings fund in addition to providing a life cover. If you pass away while the plan is in force, your nominee will be paid the death benefit, i.e., a fixed sum of money. And, if you survive till the end of the term, a maturity benefit is paid to you.

Endowment plans can either be participating or non-participating in nature.

• A participating endowment plan will pay a variable bonus in addition to the death benefit or maturity benefit. This bonus accrues from the profits made by the insurance company by investing in financial instruments like bonds, securities, etc. So, a participating endowment plan offers both guaranteed as well as non-guaranteed returns.
• A non-participating endowment plan does not offer any bonuses - it only offers guaranteed returns. A fixed benefit is payable under this plan - the payout is given to you when the policy matures or to your nominee if you pass away while the plan is active.

You can learn about endowment plans in detail in this article here: Read Here!

Example:
Let’s say Niharika buys a Participating Endowment Plan in 2023 for a duration of 40 years and chooses a sum assured of Rs. 50 Lakhs while purchasing the plan. The annual premium according to the sum assured comes around Rs. 2 Lakhs. As per the policy terms, the death and maturity benefit payable under the policy will be equal to the sum assured plus any accrued bonuses.

So, if Niharika passes away while the plan is active, the insurance company will pay a death benefit of Rs. 50 Lakhs along with any accrued bonuses. And, in case she survives till the end of the term, i.e., in the year 2063, the insurance company will pay a maturity benefit of Rs. 50 Lakhs along with any accrued bonuses.

As the term implies, a money-back plan is a type of life insurance plan that gives ‘money back’ to you in the form of regular guaranteed payouts. This plan, too, is a blend of investment and insurance.

As long as you survive the policy tenure, the investment part will make periodic payouts as per the policy schedule. This payout can act as a distinct source of income and help you cover several expenses at different stages of life. The insurance part will offer financial security to your family, should something untoward happen to you.

There are three types of benefits payable under a money-back plan -

• Survival benefits:
  If you survive the policy term and pay all your premiums on time, the insurance company will pay a certain percentage of either the annual premium or the sum assured back as per the policy schedule. This is known as the survival benefit.


• Maturity benefit:
  This will be paid to you if you outlive the policy term. The maturity benefit 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 may differ from policy to policy.


• Death benefit:
  Your nominee will receive this benefit in case you pass away while the policy is active. The death benefit payable to your nominee may include -
  
  • The sum assured you choose at the time of buying the policy.
  • Any bonuses accumulated under the policy.

You can learn about money-back plans in detail in this article here:

Example:
Sukhwinder buys a Participating Money-back Plan with a sum assured of Rs. 50 Lakhs in the year 2025. He chooses a premium payment term of 10 years and a policy term of 25 years. So, he will have to keep paying the premiums for 10 years and he will be covered till the year 2050.

Under this policy -

• He will receive 10% of the sum assured as the survival benefit every year over a period of 10 years. And, the survival benefit payout period will begin right after the premium payment term is complete, i.e., it will begin from 2035.
• 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 - which will include the sum assured along with accrued bonuses.

SURVIVAL BENEFIT
Sukhwinder will start receiving the survival benefit in 2035 and this will continue over the succeeding 10 years, i.e., till 2044.

Survival benefit payable = 10% of Sum Assured
= 10% of 50,00,000
= Rs. 5,00,000.

Sukhwinder will receive Rs. 5,00,000 as the survival benefit per year from 2035 to the year 2044.

MATURITY BENEFIT
If Sukhwinder survives the entire policy term, the insurance company will pay a maturity benefit to him. This will include the sum assured of Rs. 50,00,000 along with any bonuses accrued under his policy.

DEATH BENEFIT
In case Sukhwinder passes away during the policy term, the death benefit of Rs. 50 Lakhs will be paid to his nominee along with bonuses accrued under the policy.

Here are 3 main points of difference between an Endowment Plan and a Money-back Plan.

Here are a few aspects that are similar between both Endowment and Money-back Plans.

• Participating And Non-Participating

  Both Money-back and Endowment Plans can be either participating or non-participating in nature.



• Maturity Benefit

  Under both these plans, if you outlive the policy term, the insurance company will pay a maturity benefit to you - and then the policy will terminate.



• Death Benefit

  Both these plans will provide your nominee with a death benefit, i.e., a fixed sum, if you pass away during the plan's tenure.



• Tax Benefits⁴

  Both Endowment and Money-back Plans also offer tax advantages⁴ on the annual premiums paid and the payout received. You can get the tax benefits⁴ under two sections of the Income Tax Act, 1961.
  
  • Under Section 80C, you can get a tax deduction of up to Rs. 1,50,000 on the premiums you pay every year under both plans.
  • Under Section 10(10D)³, the claim amount you or your nominee will receive is completely exempted from taxation.



• Bonuses

  A bonus component is available with both Participating Endowment Plan and Participating Money-back Plan. The bonus payable under both these plans is linked to the profits made by the insurance company - and will be paid with the death or the maturity benefit.



• Loan Facility

  There is a provision to take a loan against both Endowment and a Money-back Plan. These plans serve as collateral for loans. Suppose you need to take a home loan to buy a new apartment. You can use these plans as collateral for the home loan you take.

This brings us to the end of this article. Hope this article helped you gain enough clarity on how both Endowment and Money-back Plans work and differ from each other. Both these plans are a blend of insurance and investment. You can consider buying a Money-back Plan if you want periodic returns at regular intervals. And, if you want to accumulate a savings fund, you can choose an Endowment Plan.