What is a Money Back Policy?
At its core, a money back policy is a variation of life insurance that prioritizes survival benefits. Most traditional plans are built around a distant finish line; you either get the money when the policy matures, or your family receives it if you pass away. A money back policy breaks that mold. It offers survival benefits, which are essentially regular payouts during the policy’s term.
These payouts are timed to help you handle life’s big checkpoints, like a child’s tuition, a home renovation, or even a vacation. If the policyholder passes away before the term ends, the plan still fulfills its promise: the nominee receives the full sum assured, and the insurer usually does not deduct any of the survival benefits already paid out. It is a way to balance the need for an emergency fund with long-term security.
How Does a Money Back Policy Work?
Let us understand how a money back insurance policy functions:
Premium Payment
To keep the policy active, you agree to pay a set premium over a chosen duration. This can be a one time investment plan or a recurring deposit, monthly, quarterly, or annually. Think of this as the fuel for your financial vehicle; it funds both your life insurance cover and the pool of money that will eventually be returned to you.
Survival Benefits
At pre-defined intervals during the policy term, say, every 4 or 5 years, the insurance company pays you a percentage of the total sum assured. These are guaranteed milestones that provide liquidity without you having to take a loan or cancel the policy.
Maturity Benefit
If you survive through the entire policy term, you will receive the remaining balance of the sum assured. Along with this final installment, you usually get any accrued bonuses that have stacked up over the years. It is a final lump sum that can act as a significant boost to your retirement savings or other long-term goals.
Death Benefit
Despite the periodic payouts, the primary mission of the policy remains protection. If the policyholder passes away during the term, the beneficiaries are paid the full sum assured. The beauty of most money back plans is that this payout is made in full, regardless of how much has already been paid out via survival benefits.
Let us understand the working of a money back policy with the help of an example. Imagine a 25-year-old individual who purchases a 25-year money back investment plan with a sum assured of ₹15 lakh. The plan is designed to pay 15% of the sum assured every five years as survival benefits.
Here is how the payouts would work:
- At the end of the 5th year: ₹2.25 lakhs
- At the end of the 10th year: ₹2.25 lakhs
- At the end of the 15th year: ₹2.25 lakhs
- At the end of the 20th year: ₹2.25 lakhs
Upon policy maturity at the end of the 25th year, the remaining ₹6 lakhs, along with any applicable bonuses, would be paid as the maturity benefit. In the event that the policyholder passes away during the 25-year term, the nominee will receive the full sum assured of ₹15 lakhs, regardless of any survival benefits already disbursed, ensuring that the policyholder’s family’s financial goals remain protected.
This structure offers the advantage of liquidity, similar to a recurring deposit, but with the added benefits of life cover and bonuses.
Key Features of Money Back Policy
Choosing the right financial path requires knowing exactly what a product brings to the table. Here is the breakdown of the key features of the policy.
Guaranteed Returns
Unlike the stock market, which can be a rollercoaster, money back policies are built on the foundation of certainty. You know exactly when you will receive your payouts and how much they will be. This makes them a fixed part of your financial plan.
Life Coverage
It is, first and foremost, a life insurance policy. The policy ensures that your family’s standard of living is protected from the unexpected. If you are not there to provide for them, the sum assured acts as a financial guardian..
Flexibility
You can usually tailor the frequency of your premiums, going with annual payments if you get a year-end bonus, or monthly if you prefer a steady budget. You can also choose to pay semi-annually or quarterly. You can also pick a policy term that matches your desired retirement age.
Survival Benefit
These are the milestone payments. Usually calculated as a fixed percentage of your sum assured, they get credited to your bank account while the policy is still active. They are yours to spend, invest, or save as you see fit.
Maturity Benefit
When you reach the end of the term, you get the maturity benefit. It is the remaining portion of your sum assured plus any bonuses, often used to fund a comfortable transition into retirement.
Death Benefit
The death benefit provides a tax-free lump sum to your loved ones. It is a promise of financial continuity, ensuring that bills are paid and dreams stay on track even in your absence.
Benefits of a Money Back Policy
Now, let us understand the benefits of a money back policy:
Added Bonus
One significant advantage of a money return policy is the potential for bonuses. These bonuses are additional amounts added to the sum assured over the policy term. Reversionary bonuses are declared annually and paid out periodically, enhancing the overall returns. Terminal bonuses, on the other hand, are paid at the end of the policy term, further boosting the maturity benefit.
Comes with a Low-profile Risk Instrument
If the volatility of stocks or mutual funds makes you nervous, this is your safe harbor. Money back plans are generally considered low-risk because the returns are backed by the insurer’s stability, not the daily fluctuation of the market index.
Secondary Source of Income
The survival benefits function as a bonus paycheck. Whether it is to pay for a vacation or cover an annual insurance premium for another policy, this predictable stream of cash helps ease the pressure on your primary salary.
Life Cover
Beyond the financial returns, a money return policy provides essential life insurance coverage. In the unfortunate case of your demise during the policy term, your beneficiaries will receive the sum assured as the death benefit. This ensures that your family members are financially protected and can maintain their lifestyle without you as their primary breadwinner.
Tax Benefits
Money back policies offer tax benefits on paid premiums and received payouts. Premiums paid towards the policy are eligible for tax deductions under Section 80C of the Income Tax Act up to a specified limit. Additionally, the maturity benefits and death benefits received under the policy are usually tax-free under Section 10(10D), subject to conditions.
Eligibility Criteria for buying a Money-Back plan
Before you sign up, you need to see if you fit the standard profile for these plans. While every insurer has their own eligibility criteria, the general rules include:
Entry Age:
Usually starts as young as 18, with some plans allowing parents to buy for their children.
Maximum Age:
Most plans require you to be under 50 or 55 to start.
Policy Term:
Generally ranges from 10 to 25 years.
Sum Assured:
There is usually a minimum amount that you must commit to insuring.
Why Do You Need to Buy Money Back Policy?
It is not just an insurance policy; it is a strategy. Unlike standard plans, where your money is locked in until the very end, this policy stays active in your life. It funds your short-term hurdles while keeping an eye on the long-term finish line.
If you are planning for a child’s education or simply want a low-risk way to ensure you have cash on hand every few years without sacrificing life insurance, this is your best bet.
How to Choose the Best Money Back Policy?
A money back policy provides periodic payouts and life coverage, making it an attractive option for you if you want to balance your savings and insurance. To ensure you select the best policy for your needs, evaluate the following aspects:
Financial Goals
Money back policies are suitable for both long term investment plans and short term investment plans. For example, if you are looking to fund upcoming goals such as buying a car or making a down payment on a house, the regular payouts can offer timely support. It is important to evaluate your short and long-term objectives before choosing a plan that aligns with your financial needs.
Coverage
Consider factors like your family’s standard of living, living expenses, and contribution to the total family income when determining the sum assured amount. This amount should cover your family’s immediate and long-term needs.
Policy Term
It is crucial to thoroughly read the terms and conditions of a money back policy before finalizing it. There can be various exclusions that are not prominently displayed in advertisements. Understanding all the terms and conditions will help you know the consequences of different situations you may face.
Premium Amount
The premium amount is another critical factor that you need to consider. Choose a premium that does not become a financial burden on you and ensure that it fits within your budget.
Riders
Some insurance requirements, such as critical illness coverage and accidental death coverage, may not be included in the base policy. Select riders wisely based on your financial needs and affordability to enhance your policy coverage.
Company’s Claim Settlement Ratio
Check the claim settlement ratio of the insurance company. This percentage reflects how many claims the company has settled out of 100. A higher ratio increases the likelihood that your claim will be settled promptly and efficiently.
Who Should Buy a Money Back Plan?
A money back plan is ideal for individuals who value both protection and periodic liquidity. Here’s who can benefit most:
Young Families
Those looking to secure their family’s future while maintaining access to funds at regular intervals.
Conservative Investors
Individuals who prefer stable, guaranteed returns over high-risk investments.
Retirees and Pre-Retirees
People seeking a reliable income stream during retirement without the unpredictability of market-linked options.
Disciplined Savers
Long-term planners aiming to align periodic payouts with key life milestones such as education or home purchase.
Tax-Conscious Individuals
Those who wish to avail tax advantages while building a financial cushion.
Financial Security Seekers
Anyone looking to combine insurance with consistent returns for added peace of mind.
Types of Money Back Policies
Money back policies come in various formats to suit different financial goals and life stages. Below are five common types, each designed with specific benefits and features:
Traditional Money Back Policy
A traditional money back policy offers fixed, guaranteed payouts at regular intervals during the policy term. These periodic returns provide a stable income while the plan continues to offer life insurance coverage. At maturity, the remaining sum assured and bonuses are paid out, making it a dependable choice for risk-averse individuals.
Unit-Linked Money Back Policy
This type of policy blends life insurance with market-linked investments. A portion of your premium is invested in equity or debt funds, depending on your risk appetite. While you continue to receive periodic payouts, the maturity benefit may vary depending on fund performance. It is ideal for those who want potential wealth growth alongside insurance.
Things to Consider Before Buying a Money Back Plan
So, now you are thinking about getting a money back insurance plan? That is great now that you know what is money back policy, its functioning, and its advantages. They can be a good option if you want some regular income along with the chance to grow your money. But before you jump in, here are a few things to think about:
- Make sure you really understand how these plans work. It is not as simple as just putting money in and getting it back. There are specific rules about when and how much you get back.
- Think about what you are hoping to get out of this. How much money do you want back and when? Does this plan actually offer that?
- Be sure about how much risk you are comfortable with. Money back insurance plans are generally low risk, but that also means they might not grow your money as fast as other options.
Fixed Deposit (FD) and Money Back Policy
Regarding financial planning, choosing between an FD and a money back policy involves understanding their respective features, benefits, and suitability for your financial goals. Here is a comparison of the two:
| Feature |
Fixed Deposit (FD) |
Money Back Policy |
|---|
| Purpose |
Savings and earning interest over a specified period. |
Insurance and investment, providing periodic returns and life cover. |
| Risk Level |
Low risk, as it offers guaranteed returns. |
Moderate risk, as returns are guaranteed but dependent on the insurer’s solvency. |
| Returns |
Predetermined and fixed interest rate. |
Periodic payouts and a maturity benefit; bonuses may be included. |
| Coverage |
No insurance coverage. |
Provides life insurance coverage along with investment returns. |
| Tax Benefits |
High – can be broken anytime with a small penalty. |
Moderate – periodic payouts offer liquidity, but not fully flexible. |
| Liquidity |
Interest earned is taxable; a tax deduction is available under Section 80C for certain deposits (up to ₹1.5 lakh per year). |
Premiums paid are eligible for tax deductions under Section 80C; maturity benefits may be tax-free under Section 10(10D). |
| Maturity Value |
Guaranteed, based on fixed interest rate |
Guaranteed, along with bonuses (if applicable) |
| Term |
Flexible – usually ranges from 7 days to 10 years |
Fixed – usually 15 to 25 years |
| Payouts |
Interest paid monthly, quarterly, or at maturity |
Survival benefits paid at specific intervals + maturity benefit |
| Insurance Coverage |
Not included |
Includes life insurance cover |
| Returns |
Fixed returns based on prevailing interest rates |
Moderate returns + risk cover |
| Tax Benefits |
Under Section 80C (for tax-saving FDs only) |
Under Section 80C and tax-free maturity under Section 10(10D) |
FAQs on Money Back Policy
1
Can I take a loan against my money back policy?
Yes. Once your policy has acquired a surrender value (usually after 2 or 3 years of premiums), most insurers will let you borrow against it at a competitive interest rate.
2
What happens if I miss a premium payment?
You usually get a grace period (around 30 days). If you miss that, the policy might lapse, though you can often revive it by paying the dues and a small penalty.
3
Are money back policies suitable for long term financial goals?
Yes, money back policies can be suitable for long-term financial goals as they provide periodic payouts, a lump sum on maturity, and life coverage.
4
Can I surrender my money back policy before maturity?
Yes, you can surrender your money back policy before maturity, which may incur penalties and result in a lower payout than the total premiums paid.
5
Is the bonus received from a money back policy taxable?
In most cases, no. As long as your annual premium is within 10% of the sum assured, the bonuses and payouts are typically tax-free.
6
How is the survival benefit calculated in a money back policy?
The survival benefit is calculated as a percentage of the sum assured and is paid at regular intervals during the policy term, as specified in the policy details.
