Ch. 3: What are the benefits of Money Back Policy?

Like the name suggests, a money-back plan pays your money back in the form of milestone-based payouts at specific intervals of time. It can be the perfect fit for you if you’re looking for a product that provides both insurance and investment opportunities.

In this article, let’s take a look at some of the benefits a money-back plan offers.

Guaranteed² Periodic Payouts for milestones
Money-back plans offer survival benefits, i.e., guaranteed² periodic payments which are a percentage of either the sum assured or the annual premiums you pay. This is one of the biggest advantages of money-back plans - they can provide liquidity during the policy tenure.

The survival benefit is paid at specific intervals (generally every few years) over the lifetime of the policy. Some policies also allow you to receive this benefit when the policy matures. The survival benefit you receive under the money-back policy can act as a separate source of income for you and your family. You can use these payouts to cover the milestones you have in mind, for example, EMIs for a car you intend to buy, a prestigious music training course for your child, post-retirement expenses, etc.

If you pass away while the policy is active, your nominee will receive the death benefit, i.e., a fixed amount of money. The amount that will be paid to your nominee will include the sum assured as well as any bonus accumulated under the policy. Also, this amount will be exclusive of the survival benefits that are paid to you while you’re alive.

Let’s understand this better with Kiara’s example.

Say Kiara buys a Rs. 50 Lakhs Participating Sum Assured Front money-back plan for a duration of 25 years. Under this plan, Kiara is supposed to receive a survival benefit of 10% of the sum assured every 5 years. Say Kiara gets Rs. 5 Lakhs in the 5th, 10th, 15th, and 20th year and dies in the 21st year of the policy. In this case, irrespective of the survival benefits paid, Kiara's nominee will receive a death benefit of Rs. 50 lakhs along with any bonuses accrued in the policy.

The amount payable at the end of the policy term is called maturity benefit. The maturity benefit payable under a money-back plan will vary across plans and insurance companies. In some money-back policies, it includes the sum assured and the bonuses accrued over time. It can also be just the bonus, or the survival benefit in the form of periodic payouts - depending on the policy you choose.

Let's take Kiara's example again. Had Kiara survived the entire policy term, she would have received the maturity benefit as follows:

• Sum assured of Rs. 50 Lakhs.
• Bonuses accumulated in her plan.

You also get tax benefits³ for the premiums as well as the maturity benefit received under a money-back plan. These advantages can be availed under different sections of the Income Tax Act, 1961.

As per section 80C of the Income Tax Act, 1961, you can get tax deductions of up to Rs. 1,50,000 on the premiums you pay every year. And the maturity benefit you receive at the end of the policy term is completely exempted from taxation under section 10(10D).

Financial instruments like mutual funds are directly affected by stock market movements. This is not the case with money-back plans. They promise guaranteed² returns at specific intervals - making it a low-risk instrument. So, whatever is promised by the insurer, will be paid out to you or your nominee. Money-back policies act as a shield that reduces the risk of your investment portfolio. It pays the death benefit to your nominee if you pass away during the policy tenure and if you don’t, it offers you a guaranteed² return at the time of maturity.

You can also use the money-back plan as collateral for loans. You can use it to obtain a loan for buying a house, your child’s wedding, etc.

For instance, you want to avail a loan for the down payment of a new car you wish to purchase. You can use the money-back policy as a collateral for the same.

In addition to all the above benefits, participating money-back plans also offer bonuses. There are three types of bonuses payable under a money-back policy. Let’s learn in detail about both these types of bonuses.

Reversionary Bonus
Depending on its performance every year, the insurance company declares a bonus, which is given to you, as a percentage of your policy sum assured or any accrued bonuses. This percentage is known as the “reversionary bonus rate”. The declared bonus is then added to the sum assured every year which is either paid as a death benefit or the maturity benefit at the end of the policy term.

The reversionary bonus is further divided into two -

• Simple reversionary bonus
  Calculated by multiplying the sum assured and the reversionary bonus rate.
• Compound reversionary bonus
  Calculated by multiplying both the sum assured and the previously accrued bonuses with the reversionary bonus rate.

Let’s understand both these types of bonuses with the help of an example.

Say you have taken a Participating Money-back policy with a cover amount of Rs. 10 Lakhs. The policy offers a simple reversionary bonus at the rate of 5% of the sum assured. So, if the sum assured is Rs. 10 Lakhs, you will receive a bonus of Rs. 50,000 every year.

Now, say your friend, too, has taken a Participating Money-back policy with a cover amount of Rs. 10 Lakhs. Let’s say your friend’s policy offers the compound reversionary bonus at the rate of 5%. Here's how the bonus will be calculated -

Year 1 -

• Sum assured is Rs. 10,00,000
• Bonus will be Rs. 50,000 (5% of 10,00,000)

Year 2 -

• Sum assured will become Rs. 10,50,000 (10,00,000 + 50,000 bonus)
• Bonus will be Rs. 52,500 (5% of 10,50,000)

Year 3 -

• Sum assured will become Rs. 11,02,500 (10,50,000 + 52,500 bonus)
• Bonus will be Rs. 55,125 (5% of 11,02,500)

And so on…

Terminal Bonus
Also known as a persistency bonus, this bonus is either paid to you at the end of the policy term or to your nominee in the unfortunate event of your death.

Generally, insurers offer the terminal bonus to acknowledge the consistent payment of the premium over the term of the money-back policy. This bonus is paid at the discretion of the insurer, so it is not certain that you or your nominee will get this bonus.

Cash Bonus
The cash bonus is declared by the insurance company as a percentage of the yearly premiums paid by you. It is paid to you at the end of each year in cash.

A money-back policy offers the best of both the insurance and investment worlds. If you’re looking for a low-risk investment product that gives assured returns, tax advantages, regular payouts, bonus, and also offers protection to your loved ones if you pass away, a money-back plan would be a great option to invest in.