What Is a Money-Back Policy?
A money-back insurance plan is a life insurance plan wherein, along with life protection, you get periodic returns in the form of a money-back benefit. Given this feature, money-back plans prove to be an attractive option for those seeking security and liquidity.
A money-back policy pays survival benefits at periodic intervals during the term of the policy in addition to a maturity benefit and death cover. This feature provides the policyholder with financial assistance for short-term and medium-term needs.
Important features of a money-back policy:
- Regular payouts during the policy term (survival benefits).
- The money back benefits are usually expressed as a percentage of the sum assured
- The remaining sum assured is paid as the maturity benefit at the end of the policy tenure.
- A death benefit is paid to the nominee if the life insured passes away during the policy term. This benefit is paid in full, irrespective of the money-back benefits already paid under the plan
- Liquidity by way of periodic returns for funding requirements.
- Some money-back plans might also offer bonus additions that increase the policy benefits
What Is an Endowment Policy?
An endowment plan is a life insurance savings plan that offers financial protection along with savings. The policyholder gets a lump sum amount on maturity if they survive the policy term. Alternatively, if the life assured passes away during the policy term, the nominee receives the death benefit.
The combination of savings and life insurance coverage makes endowment plans suitable for long-term financial planning, like covering a child's education, buying a house, or creating a retirement corpus.
The major features of an endowment policy are as follows -
- Assured* maturity benefit at the end of the policy term.
- Life cover for securing the family's finances.
- Promotes long-term financial stability and encourages savings.
- Some plans might offer bonus additions that enhance the overall policy benefits
- Specific goal-oriented endowment plans are also available, like child endowment plans, whole-life plans, etc.
Key Differences Between Money-Back and Endowment Policies
Money-back policies and endowment policies both provide financial protection along with savings but differ in terms of features and timing of benefits. Let’s analyse the differences between the two types of plans -
Payout Conditions
Money-back policies pay survival benefits periodically to provide liquidity over the policy term. Endowment policies, on the other hand, usually make a lump sum payment at maturity or upon the death of the life assured .In some endowment plans, however, depending on the insurer and the specific product features, the policy benefits can be paid in installments too.
Liquidity
Since they make periodic payments, money-back policies offer greater liquidity, appropriate for short-term goals such as education or domestic expenses. Endowment plans have a long-term horizon and thus are more suitable for disciplined savings, which can be used for long-term financial goals like a child’s higher education, wedding, or retirement.
Money Back vs. Endowment
| Feature | Endowment Policy | Money-back Policy |
|---|
Payout condition
| Payout is done in a lump sum, however, depending on the insurer and the specific product features, can be done in instalments or in a combination of both (including the bonuses, if declared accumulated during the policy period) at the time of maturity or in case of death
| Periodic payment (survival benefit) during the term of the policy, along with the remaining sum assured on maturity.
In case of death, the nominee receives the full death benefit irrespective of the money-back benefits paid.
|
Liquidity
| The liquidity is low, as the amount is locked till the maturity period.
| The liquidity is high, as the policyholder gets regular payouts during the policy period.
|
Suitability
| Endowment plans are suitable for saving up for long-term financial goals
| Money-back plans are suitable for medium-term goals which can be met with the survival benefits received
|
Benefits of Choosing a Money-Back Policy
A money-back policy is a sensible choice for those who desire life insurance coverage as well as liquidity. Here's why buying a money-back plan may be a suitable choice:
- Financial Flexibility—Survival benefits paid at intervals enable policyholders to cover regular expenses like home improvements, holidays, or children's education without tapping into savings.
- Periodic Income—The periodic guaranteed* payments serve as a regular income stream, ensuring financial security during the term.
- Tax Perks–Premiums paid, survival and maturity proceeds usually qualify for exemptions and deductions under Section 80C and Section 10(10D) respectively, lowering the overall tax burden.
- Target Audience– Most appropriate for those having medium-term objectives, e.g., parents financing education milestones, saving up for a down payment on a home or buying a car, etc.
Benefits of Choosing an Endowment Policy
Here are the reasons why buying an endowment plan can be an intelligent move:
- Long-Term Savings—Promotes disciplined saving over the policy tenure. You can choose a long-term policy that aligns with your long-term goals and builds a stable corpus.
- Flexible Payout—Most plans have a flexible payout option wherein the policy benefit can be taken in a lump sum, however, depending on the insurer and the specific product features, can be done in instalments or in a combination of both as well. This can prove ideal for long-term objectives such as saving for retirement, buying a home, or financing a child's higher studies.
- Bonus Additions—Annual and terminal bonuses (if declared) are available on participating endowment policies, which increase the total maturity and death benefits.
- Suites Long-Term Planners – Designed for those who want to create a long-term corpus for their financial goals.
Can I Get any Benefit from an Endowment Plan?
Endowment plans offer the policy benefits on maturity or premature demise. Any other benefit is not paid during the policy tenure. However, if you need funds, you can take a policy loan from the plan and get access to funds for your financial needs.
Which Policy Should You Choose? Factors to Consider
If you are asking yourself, "Should I buy a money-back or endowment plan?" The response would be based on your financial needs. Both plans provide life cover as well as savings, yet their applicability differs on an individual basis. Following is a brief checklist to assist you in determining whether a money-back or endowment policy is better:
- Goals – If you require periodic payouts for mid-term goals such as children's education or lifestyle costs, buying a car, etc., a money-back plan is preferable. For long-term goals such as retirement or the purchase of a house, an endowment policy is better.
- Payout Requirements – Select money back for regular income or an endowment for creating a long-term corpus.
Key Takeaways
- Money-back policies give periodic payments throughout the policy term, providing liquidity for medium-term needs.
- Endowment policies can provide lump sum, instalment or a combination of lump sum and instalment payouts at maturity or on death and thus are better suited for long-term requirements.
- Money-back and endowment policies differ in payout mode, liquidity, and their features.
- Select a money-back plan when you want regular income and flexibility. Go for an endowment policy if you want disciplined savings to build a corpus for the future.
Conclusion
If you ask which is better - a money-back or an endowment policy, the answer solely rests on your financial goals and needs. A money-back policy is suitable for those who require periodic liquidity, and an endowment policy is better for individuals who favour disciplined savings and long-term wealth accumulation. You can also buy both types of plans for different financial needs and enjoy the benefits that each has to offer. So, assess your needs and then make an informed choice.
Frequently Asked Questions (FAQs)
What happens to the premiums if I surrender a money-back policy early?
If you surrender the money-back policy early, then you will be paid a surrender value, subject to policy terms & conditions and the policy would be terminated.
Can I customise the payout intervals in a money-back plan?
No, payout intervals are set according to the terms and conditions of the policy. You might get the option to choose the intervals from different options provided by the insurance company.
Is the maturity benefit guaranteed in endowment policies?
Yes, the maturity benefit is assured*, and in most cases, it is augmented with bonuses, if declared by the insurer during the policy period.
What if I want both periodic income and a lump sum at maturity?
A money-back policy is suitable for regular payouts along with a maturity benefit, providing a balance between liquidity and savings.
How does inflation affect returns from money-back or endowment policies?
Inflation lessens the real value of returns because these policies pay fixed benefits that might not factor in the inflated costs of your financial goals.
