Ch. 14: Things To Consider Before Buying Money Back Policy

When you buy a new house, what things do you check? You decide whether you can afford it, whether it’s big enough for your family, whether the society's amenities are enough, and whether you can expect its property value to increase. If everything looks good, you finalize the purchase.

You will find yourself in a similar situation when it comes to insurance policies, including money-back insurance plans. There are a few things that you should check and confirm before jumping on to the bandwagon. You need to make sure that the money you’re investing will provide you with returns that are useful to you and your family.

Let’s have a look.

Money-back policies are basically a type of life insurance policies that include both investment and insurance components.

The investment part will make frequent payouts as per the policy schedule as long as you survive the policy term. This ensures a steady source of income to help you meet expenses at different stages. The insurance part provides financial security to your dependents, so they live a comfortable life even in your absence.

These payouts are known as the survival benefit. You will also be eligible to receive a maturity benefit along with any accrued bonuses and survival benefit remainders - once the policy matures. If, in any case, you pass away during the policy term, your nominee is eligible to receive a death benefit along with any accrued bonuses.

See, buying an insurance plan is a huge decision. You pay premiums from your own pocket and you also need to be sure that the returns are worth it for both you and your family, which is why you need to look at a few things before you choose a policy -

1. Buy because you need it
Before you select the policy, you need to understand the purpose of buying one and whether you actually need it. A money-back plan is designed to pay out regular amounts of money as the survival benefit during the policy term and a death and maturity benefit.

The regular payouts can act as a new income channel which you use for any investment you wish to make, your child’s wedding expenses, post-retirement expenses, etc. On the other hand, the death benefit will act as a safety net for your family’s needs in your absence. If you survive the policy term, you will be eligible to receive the maturity benefit.

2. Be aware of the financial commitments
Money Back is a long term investment product, that comes with two important commitments -

1. Minimum payment term
Most money-back policies, barring a few exceptions, will give you the payouts after the premium payment term is over. Generally, this term will, at a minimum, range around 6-8 years or 10-12 years - depending on the product you choose. You need to commit to paying the premiums regularly over this entire time span to ensure that you will receive the payouts.

2. Minimum years of lock-in from withdrawal.
So, as understood from the previous point, you are required to pay the due premiums for a predetermined number of years. Beyond this, the policy schedule may also specify a deferred period, i.e., a duration where you have paid all your premiums but the insurer hasn’t started giving you the payouts yet. This may be zero years in some cases - you receive the payouts as soon as you pay all the premiums. But, in most cases, it will be a set number of years, say 2 years, 4 years, 6 years, etc. Withdrawing any money during this ‘lock-in period’ may result in huge losses to the funds your policy has accumulated.

3. Calculate the right money-back amount and sum assured
You must select a plan that has the correct amount to cover the goals you have envisioned. The payouts should cover key milestones like your child's higher education fees, EMIs for a vehicle/house, retirement, etc.

Some plans give you a percentage of the sum assured as the survival payouts, while others give you a percentage of the annual premium. Read the policy documents carefully and pick the option that’s right for your needs.

4. Be aware of the returns on your investment
You can know the exact returns you will get on your investment by calculating the Internal Rate of Return (IRR) for the same. The IRR is a financial metric that compares the returns from two different cash flow streams, i.e. your inflows and outflows. It tells you how profitable your investment will be. The higher the IRR, the better your investment is.

You can ask the insurance company or your financial advisor the IRR for the IRR of your investment. You can also figure it out yourself by using online calculators.

Go ahead with the policy only if you are satisfied with the returns and know that they will cover the milestones you have envisioned.

5. Beware of making withdrawals
A money-back plan is a long-term commitment, because most of the money-back policies will give you the payouts after the premium payment term and deferred period. Hence, the money you invest in a money-back policy is locked in for a long and fixed period of time, which is why it is a huge decision that should be taken after a lot of deliberation. Surrendering the policy may result in significant losses.

Example - Arun purchased a money-back policy which stated that the survival payout would start after a premium payment term of 10 years and a deferred period of 3 years. Hence, his money will be locked in for a total period of 13 years before he starts receiving the payout. If he decides to surrender the policy in the 9th year, he shall receive a surrender value which may be significantly lower than the payouts and he might have to bear losses.

6. Understand the guaranteed² and non-guaranteed benefits
A guaranteed² benefit is the sum assured and accrued bonus you’ll certainly receive. Bonuses are variable or non-guaranteed benefits. They depend on the future performance of the insurance company, economic conditions, etc.

You should always get a benefit illustration from your financial advisor to know the guaranteed² and non-guaranteed benefits that the policy will provide you. Check if the benefits will be sufficient for you and your family in the future or not.

7. Choose the right frequency of the payouts
The payouts should align with the goals you wish to cover. It can be educational expenses, wedding expenses, buying a house, retirement needs, etc.

You should be aware of the frequency of the money-back given to you by the insurer. It may differ from insurer to insurer. There are plans that provide money-back every year and there are plans that provide money-back once in 2 years. You must select the frequency depending on your financial goals.

For example -
Manish and Reena want to buy money-back policies but are confused about the payout frequency they should choose. Policy A provides the money-back payout every year while Policy B provides the money-back payout every 2 years.

Manish, a 30-year-old male, is planning on buying a house and would require an extra bit of income for paying his EMIs. He also wants to save for his retirement as well as secure the finances of his wife and kid. Policy A would be a better choice for his financial goals.

Reena, a 40-year-old female, has two daughters aged 20 and 18. She needs funds for their higher education and weddings in a few years. Policy B would be a better option for Reena because these events are spaced out in a similar frequency.

8. Understand the amount you can spare for premium payment
You also need to make sure that you have a steady income to pay the premiums of the insurance plan on a regular basis. Not doing so might lead to the policy lapsing. This, in turn, may result in the policyholder losing the scheme or the benefits, or else he/she may end up paying the late fees and penalty.

Keep in mind that the premium amount of a money-back plan is divided into 2 parts - insurance premium and investment premium. Hence, the premium may be higher as compared to normal term plans.

It is important to note that you should not sacrifice your present needs for your future ones, especially when this might affect your daily lifestyle.

9. Premium payment frequency and term
You can also choose how frequently you want to pay the policy premiums based on your convenience and financial situation. You can choose from the annual, semi-annual, quarterly, and monthly premium payment options.

The next aspect you should look at is whether a limited pay option is available with the Money-Back Policy you wish to buy. A limited pay option will ensure you don’t have to pay the premiums of the policy for the entire policy duration.

Important Note - Irrespective of the type of payment frequency you choose, make sure you set up auto-debit or standing instructions on your bank account so that your premiums are paid on time and your policy doesn’t lapse.

10. Policy Surrender Benefits
While investing in a money-back plan, you may want to stop the same because of financial hassles or because you don’t need the policy anymore. Maybe you have found a policy with better returns or your family isn’t dependent on you anymore.

Since insurance is a long commitment, you should be aware of the consequences of discontinuing the policy you are paying premiums for. You should know the amount of money you would get and the amount of money you would lose when you surrender your policy.

11. Riders available with the policy
You can customise the policy you’ve chosen with add-on benefits known as Riders, at an affordable cost. They are useful tools that will help you expand your insurance coverage.

For instance, in case of accidental death, the Accidental Death Rider will pay an additional sum of money to your family.

Some common riders most insurance companies offer -

• Accidental Death Rider
• Accidental Disability Rider
• Critical Illness Rider
• Hospital Care Rider
• Surgical Care Rider
• Waiver of Premium due to Disability Rider
• Waiver of Premium due to Critical Illness Rider

Options for riders will be different for different products and insurers.

12. Free-look period in the policy
You can go through the policy wordings, benefits, terms and conditions, exclusions, etc. of the policy you just purchased - during the Free-Look Period. If you're not satisfied or come across conditions or limitations that you feel are not right for you, you can return the policy to the insurance company without any penalty or cancellation charges. So, make sure you check the length and the terms and conditions of the free look period provided under the policy you’re going to purchase.

13. Grace period and Revival period in the policy
The grace period is an additional time frame you get from the insurer to make any outstanding premium payments. If you fail to pay your premiums in the grace period, your policy will lapse, i.e., all benefits under the policy will cease. After this, the insurance company will provide a revival period during which you can get your lapsed policy back.

The conditions for both the grace period and revival period vary across insurers - so, ensure you check and understand this properly before making the purchase.

14. Nominee of the policy
You will also be required to identify a nominee (or multiple nominees) who will receive the claim amount in the event of your death. You can choose any family member to be your nominee - your spouse, children, or even your parents or your siblings.

15. Do your research!
As mentioned in the example at the beginning of the article, you will always look at the various aspects of the house you wish to purchase and also the benefits and amenities the society offers. You will also ensure that the locality is a good place to live in, the construction is premium, and the builder is at the top of their game.

Similarly, since insurance is a long-term monetary commitment that acts as a financial cushion, it is absolutely necessary that you go through every detail about the policy and the insurer - before you purchase it. Compare the various options available along with the insurance companies that are selling those policies. You must compare the benefits, features, and limitations of the insurance policies - the returns, bonuses, past performance of the insurance companies, etc., and then, make an informed decision. You should also check the returns and bonuses given by the insurer to the existing policyholders in the past, their history of claim settlement, any information you can get about their services from other customers.

16. Speak to a good financial advisor
Insurance is complex, we know. There is a lot of jargon and nitty gritty details that might be hard to grasp or simply very boring to go through! The calculations, comparison, research, could get mind-numbing. Remember, a money-back plan is a huge investment on your end and the returns for the same should be sufficient for you and your family. To ensure you don’t go wrong, you can seek help or talk to a good financial advisor who can guide you and help you make informed decisions.

Make the right insurance decision and investment by being aware and understanding the various fundamentals and details of the money-back plans that insurers have to offer. Benefits and premiums are different for each insurance company and the capacity to pay as well as future goals are different for each individual. It’s crucial that you strike the right balance between these two aspects to ensure that your goals are achieved and finances secured.