Right Investment for Your Family: Term Plan or Money Back Plan?
This is a money-driven world. We realize that the more we earn, the higher are our living standards. We know that if something happens to us, our dependents will have a difficult time in living their life.
The thought of losing everything you have is painful but important to think about. You need to secure your loved ones’ future. Therefore, it is very important that we buy life insurance policy as soon as possible to ensure their financial security even in your absence.
It is being looked at as an investment now. Lower premium values on online plans make them appeal to us more. However, so many variants of life insurance are available that it becomes difficult for people to choose the one that suits them the most. Term insurance guarantees a higher cover amount for as little premium as possible. At the same time, the returns offered by money-back plans are attractive. We can’t assert the dominance of one over the other though. It depends on your requirements.
What is a Term Plan?
A term plan is a contract wherein an individual has to pay a fixed sum to an insurance company for a specified period at regular intervals. In return, the company promises to provide financial support to the insured’s dependents on the occasion of some misfortune happening to him or her during this period. A term policy assures 10-20 times the total of the premium values paid by the insured. However, if the policyholder survives the tenure, nothing is given in return. It is money down the drain.
What is a Money-back Plan?
A money-back plan is a kind of endowment insurance. Like every life insurance policy, the holder has to pay a fixed sum, called premium, to an insurance firm at regular intervals of time for a given period. In exchange for which, the firm guarantees to provide the policyholder’s beneficiaries with financial support in case of his or her untimely demise. However, in the case of endowment plans, if the policyholder survives the policy term, the sum assured is paid back along with profits on the investment. Therefore, endowment plans are investment measures. What makes money back plans different from other endowment plans is that, here, you are given small survival benefits on surviving certain time intervals. At the end of the policy tenure, a huge lump sum amount is offered to the insured. Also, money back policies have a higher liquidity rate than the usual endowment plans. They help you save for your long term needs but also to meet the short term ones in a pre-decided way.
What Should You Invest In: Term or Money Back Plan?
Type of product
Term life covers are pure insurance policies. They offer huge death benefits for nominal premium values. The policy period is also long here sometimes lasting till the insured is a hundred years old. Though there are no returns if the person is fine by the end of the policy period, having term insurance is a must to ensure your family’s well-being.
On the other hand, money back plans are endowment plans. They give assured returns but, if something was to happen to the holder during this time, they would not be enough to support his or her family. These are undertaken for investment purposes against term policies which are for insurance purposes.
Life cover
Term plans offer higher life coverage than money back plans, that too for a very low premium value. This is mainly because the two serve different purposes. A pure term plan is to ensure the peace of mind of small savers while money back plans are for investment purposes. A larger sum is required to sustain a family after its regular inflow of income is disrupted than to meet one’s future financial goals. A healthy individual can get a life cover of 1 crore against a premium of INR 700 while money back cover, guarantees only 20 lakhs (along with all the bonuses accrued by the firm) against such investment. Twenty lakhs won’t last your family for more than two-three years.
Return on Investment
Return on Investment also known as ROI is the profitability ratio. It helps a saver understand just how profitable their investments are.
ROI can be represented by the following formula –
(Net returns – Investment Cost)/Investment Cost
For instance, if a person gets a profit of 2 lakhs against an investment of INR 5 lakhs,
His ROI = (7 lakhs-5lakhs)/5lakhs
=0.4
Higher ROI leads to higher profits.
Term plans assure no return on investment. If a term policyholder dies, the amount his family members get can be 10-20 times the total of all his investments. However, if he survives the tenure, he gets nothing. Some term plans do offer a return of premiums. After deducting tax from the invested sum, the amount you get will be much less than what you previously had. On the other hand, money back plans offer you money after you survive different periods during the tenure. If something unfortunate happens, the assured sum is given to your family irrespective of what was paid earlier whereas, if you survive the tenure, you get a huge sum plus interest plus the bonus accrued to your corpus by the insurance company. Therefore, they have a high ROI unless the company you invested in goes bankrupt. So, check the company’s profile before making any decision.
Family’s Financial Security
Well, the point here is that endowment insurance can't cater to your family's needs. The cover amount assured is so small that it won't last them for more than a few years. Unless you have made some other provisions, it is unlikely that term insurance is going to help your family fulfill all their needs. The amount will most likely be spent in three-four years of daily expenses.
On the other hand, term insurance policies provide a huge sum, that too at a nominal premium. It is affordable to all. After the demise of the policyholder (during the period in which the policy is active), his family can go on with its daily life with minimal difficulties. One can opt to pay out the death benefits as monthly incomes instead of a lump sum. While coming to the coverage amount, if you have considered your future financial goals and made provisions for inflation, your family can fulfill their wishes. They can lead a financially secure as well as independent life.
Financial Goals
- When you get term insurance, the first thing on your mind is to ensure your family's well-being even in your absence. Secondly, you want the rates to be affordable. Nothing else matters.
- Money-back policies help you save and invest those savings to generate income. You can meet your short term needs once you purchase them, like paying for your children's education or a holiday abroad. At the end of the maturity period, the lump sum you get can be used to fund your retirement. However, this amount is not sufficient to support a family for more than a few years even if they lower their standards of living.
The Premiums
Term insurance plans offer lower premium values than money-back policies. The target of term insurance is to cater to the needs of small savers. Also, if the policyholder survives the tenure, it is money down the drains. Therefore, these plans are cheaper. At the same time, money-back policies are for saving and investment purposes. They offer a maturity value. They offer survival benefits to their policyholders to meet their short-term goals. Even bonus is accrued to the corpus of the insured which is paid to him or her at the time of maturity. To adjust for all of these, premiums are generally kept high. For instance, a 30-year-old man who doesn’t smoke has to pay INR 8,500 as annual premium for a term plan of 1 crore but more than 1 lakh for a money-back plan of the same coverage. That is why you see brokers trying to sell money-back plans instead of term ones.
Tax Benefits
Tax exemptions are granted to the holders of both term and money-back policies under the sections of Income Tax Act, 1961.
- Section 80C(2) guarantees that the premium values paid to the insurance firms will be exempted from tax up to a limit of 1.5 lakhs.
- Section 80D saves tax on premiums paid towards health-related riders up to a limit of INR 25,000.
- Section 10(10D) ensures that maturity benefits, survival benefits and death benefits are all tax-free.
| PARTICULARS | TERM INSURANCE POLICIES | MONEY BACK POLICIES |
|---|---|---|
| TYPE OF PRODUCT | Tool for insurance | Tool for investment |
| LIFE COVER | Higher life coverage (in crores). | Lower life coverage (in lakhs). |
| ROI | No ROI. | An assured ROI. |
| FAMILY’S FINANCIAL SECURITY | The policyholder’s family’s financial security is assured. | Death benefits are insufficient to assure the family’s finances. |
| FINANCIAL GOALS | They provide for the policyholder’s dependents after his or her demise. | They help the policyholder meet his or her short and long-term financial goals. |
| PREMIUMS OFFERED | Lower premium values are offered. | Premiums are generally higher. |
| TAX BENEFITS | Huge tax benefits are guaranteed. | Huge tax benefits are guaranteed. |
| POLICY PERIOD | They have a higher policy period which lasts up to the time the insured is 65-85 (sometimes even 100) years of age. | They are usually bought for 20-35 years. |
| SECURITY FOR LOANS | Cannot be used as security against which loans are granted. | Can be used as security against which loans are granted. |
| LIQUIDITY | Not at all liquid in nature, that is, money can’t be withdrawn from these plans. | Liquid in nature, money can be withdrawn anytime. |
| PAYOUT OPTIONS | Death benefits can be paid as a lump sum, or in the form of monthly income, or both. | Maturity or death benefits can be paid only as a lump sum amount. |
Conclusion
The fundamental natures of these two plans are so different that you cannot set a preference for one over the other. While a term insurance policy offers to take care of your dependents’ finances in case of your death, a money-back policy is a form of investment, the sum returning from which can help fulfill your financial goals. Choose the one which suits your immediate as well as future financial goals.
Financial protection against death is a must. It would be suggested that you purchase a term plan if you don’t already have one and then invest the surplus in a money-back policy. However, don’t forget other investment options which may be better suitable for you.