Using Money Back Plans as a financial planning tool

Insurance

oi-Sunil

By Sunil Fernandes

Published: Thursday, September 12, 2013, 8:36 [IST]

Money back offers have a definite appeal, even when it comes to life insurance. We all welcome the idea of cash back. Whether our expenses exceed the returns is another matter-human nature loves a good deal, and when used correctly, a money back plan can be an efficient financial planning instrument.

A money back plan is a traditional life insurance policy that allows consumers to combine insurance with investment. So, is it like an endowment plan? Not quite. A typical endowment plan pays out either when the insured expires or at the end of the policy term. A money back plan, however, makes additional pay outs at regular intervals while the policy is in play.

The Payment Structure of a Money Back Plan

In the case of a money back plan, the insurer makes regular payments (usually 20 percent of the sum assured) at intervals of five years. If the insured survives the term, he receives the sum assured plus bonuses less the payments already received. However, if the insured dies within the term, his heirs receive the full sum assured regardless of payouts received during the policy term.

Example: Mr. X buys a money back policy with term of 20 years and a sum assured of Rs. 400,000. He is due to receive payments of Rs. 80,000 at the end of the 5th, 10th and 15th years. When the term ends in the 20th year with Mr. X having survived the term, he will receive the remaining sum assured of Rs. 160,000, that is, Rs. 400,000 - (Rs. 80,000 x 3), plus any bonuses that may have accrued.
On the other hand, if Mr. X were to die in the 14th year of the term, his beneficiaries would receive the total sum assured of Rs. 400,000 plus bonuses even though two payouts of Rs. 80,000 each were made at the end of the 5th and 10th years.

Why the Money Back Plan may be a good option

Many financial advisors do not recommend money back plans citing high premiums and low returns. The rate of return on a money back plan may work out to between 7 and 10 percent, and sometimes, lower than 6 percent. A term plan offers zero returns, but the premiums are up to 25 times lower than in a money back plan.

Nevertheless, money back plans have their advantages. Sure, you stand to earn higher returns if you invest your money elsewhere. But the payments every five years can come handy in your twilight years or can be used to pay off a mortgage, for instance. Moreover, if you die during the term of the policy, your family receives the full sum assured regardless of previous payouts. Many insurance plans bar you from accessing the policy value mid-term; many others allow withdrawals and borrowings but these subsequently reduce the sum assured.

Furthermore, unlike in ULIPs, you need not switch investments based on market trends. In a money back plan, investment risk lies with the insurer, who therefore invests with caution in low-risk products; the returns are low but your money is secure.

Although not the best life insurance option, money back plans are well suited for risk-averse people with limited insurance needs, especially those who are planning for a future expense.

Written By: Deepak Yohannan

The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal

For more articles by Deepak Yohannan, please visit MyInsuranceClub.com
You may write to the author at [email protected] or connect him on Twitter @dyohannan