Ch. 9: Money Back Plans Vs Term Insurance

Before making an important decision, we have always been taught to consider all the options and assess all our possibilities thoroughly. The world of insurance is big and complex. Each policy has its own benefits and drawbacks.

Today, let’s understand two important plans - Term Life and Money-back - individually, and find out which one you should go for.

It is a life insurance plan that provides financial security to your family in case of death during the policy tenure.

Term Insurance pays your family a sum of money in case you pass away within the term of the policy. It will basically act as a replacement for your income to secure your family’s financial needs, without them having to compromise on their dreams and lifestyles. A term insurance will not pay back any money if the policyholder survives the term.

A Money-back Plan tries to provide the best of both worlds. It is a life insurance policy that gives you regular payouts (called survival benefit) along with the maturity benefit. It, at the same time, provides financial security to your family in case of death. This ensures a steady source of income to help you or your family meet expenses at different stages. These plans may be ideal for people who want a guaranteed² return on your investments.

Every life insurance product has its own advantages and disadvantages. All plans are unique and important in their own ways. Therefore, to make an informed decision, we need to grasp the differences between the two and choose the one that fits our needs.

1. Benefits
Money-Back Plans provide both investment and life insurance benefits, while Term Plans provide only life insurance benefits.

2. Sum Assured
Money-Back plans offer a low sum assured with a higher premium, making it more expensive. Term Plans offer high sum assured with lesser premium, making it more economical.

3. The Payout
The 3 integral parts of a money-back payout -

• Survival benefit
  It is equivalent to a percentage of either the sum assured or the annual premium paid by the policyholder. This survival benefit is paid as per the policy schedule as long as the policyholder survives. These payments can happen while you are paying premiums in the policy, or after the payment term has ended or sometimes even after the policy ends.
• Maturity Benefit
  You are eligible to receive this benefit once the policy matures. The maturity benefit, depending on the product, may be the sum assured with any accrued bonuses, the survival benefit (periodic payouts or lump sum), or simply the accrued bonuses.
• Death Benefit
  If you pass away during the tenure of the policy and the premiums have been paid regularly, the death benefit amount is paid to your nominee. The death benefit amount is the total sum assured of the policy and all the bonuses, if accrued. It is completely exclusive of the already paid survival benefit. Note, once the Death Benefit has been paid, in most cases, the policy benefits will cease, and no other benefit will be payable.

In the case of a Term Life policy,
the payout is only when you pass away during the term of the policy. No amount will be paid if you survive till the end of the policy.

4. Bonuses
A Money-Back policy has different types of bonuses. Term Insurance, however, does not have that provision.

5. Loans
There is a provision to take a loan against a Money-Back policy, but no such provision in the case of Term insurance.

6. Surrender
You can surrender the policy before maturity and claim a surrender value in the policy. Term insurance usually won't have a surrender value, unless you have opted for a short payment term.

• Tax benefits
  Both the policies provide tax benefits³ under the Income Tax Act. Both the premiums and the payout are exempted from tax under Sections 80C and 10 (10D) of the Act. This means the policyholders can reduce their tax liability by opting for either money back plan or term insurance plan.
• Riders
  Both the policies have the option of adding riders, to customise and enhance the plans. Riders are optional benefits that are available at a certain extra premium amount. They provide additional financial relief when you or your family face a certain type of financial risk. Some riders included with both plans - Waiver of Premium Rider, Accidental Death Rider, etc.

As we saw, both the policies have significant differences and a few similarities. We need to consider our personal goals and financial requirements when choosing between Money Back Plans and Term Life Plans. There is no clear winner. To keep the purpose of investment in mind when making a decision is of utmost importance, always.