Building wealth for future goals? Confused by too many saving options?
Some say mutual funds. Others suggest PPF. Then, agents push the money-back policy. What actually works?
Let’s see how money-back policies compare with other options and whether they fit your best savings plan strategy.
What is the Money Back Policy
A money-back policy is insurance that returns money periodically while you’re alive.
How it works:
You pay a premium for say 20 years. Every 5 years, the company gives you part of the sum assured. At the end, you get the remaining amount plus a bonus. Plus life cover throughout the period.
Example:
20-year policy, 10 lakh sum assured. Year 5: Get 2 lakhs. Year 10: Get 2 lakhs. Year 15: Get 2 lakhs. Year 20: Get the remaining 4 lakhs plus bonus.
Total: You get money back in instalments, not just at the end.
Money Back Policy Features
Life cover included:
If you die during the policy term, your family gets full sum assured immediately. Regardless of the money already received.
Survival benefits:
Money comes back at fixed intervals. You’re alive, you get paid. U e it however you want.
Maturity benefit:
At policy end, the remaining amount plus the accumulated bonus is paid.
Loan facility:
After 3 years, you can take a loan against the policy. Useful for emergencies.
Tax benefits:
Premium qualifies under Section 80C. Maturity proceeds usually tax-free under Section 10(10D).
Understanding Returns
Money-back policies don’t give spectacular returns. But they’re safe and predictable.
Expected returns:
Usually, 5-6% annually after all charges. Some with-profit policies might give 6-7%.
Compare with FD giving 6.5-7% or PPF giving 7.1%.
Why lower returns:
Part of the premium buys insurance cover. Charges for policy administration. Fund management by the company. Commissions and expenses.
What’s left grows at a moderate rate.
When Money Back Policy Works
Money-back policy fits specific situations as part of the best savings plan:
Need periodic income:
Child’s school fees come every few years. Money back instalments help pay them. Removes the pressure of arranging money.
Want forced saving:
Can’t save on your own? Premium payment forces discipline. Mis payment, policy lapses. So you stay committed.
Need insurance plus savings:
Don’t want separate term insurance and investment. One product handles both. Simpler to manage.
Very conservative investor:
Can’t handle market ups and downs. Want guaranteed returns. A money-back policy gives certainty.
Planning milestone expenses:
Know you’ll need money at specific intervals. Marriage, child’s college, house renovation. Money back payouts align with needs.
When Money Back Policy Doesn’t Work
Not the best saving plan in these situations:
Want maximum returns:
Equity mutual funds give 12-15% over the long term. Money back gives 5-6%. Big difference in the final corpus.
Need flexibility:
Money locked for policy term. Early exit means losses. Other options give better liquidity.
Want pure insurance:
Money back gives a small cover relative to the premium. Term insurance gives 20-30 times more cover for the same premium.
Building retirement corpus:
Low returns mean smaller accumulation. PPF, NPS, and mutual funds build a bigger retirement fund.
Young with long horizon:
At 25-30, you have time to take equity risk. Money back’s safety i n’t needed yet.
Comparing with Other Options
Let’s see how the money-back policy stacks against other best saving plan choices.
Money back vs Term insurance + Mutual fund:
Money back: Pay 50,000 yearly for 20 years. Get 10 lakh cover. Returns around 12-13 lakhs.
Separate approach: Term insurance 1 crore for 15,000. Remaining 35,000 in equity fund. Returns around 23 lakhs (at 12%).
A separate approach gives double returns and 10 times more insurance.
Money back vs PPF:
Both give tax benefits. Both are safe.
Money back: 5-6% returns, periodic payouts, and includes insurance. PPF: 7.1% returns, flexibility after 7 years, no insurance.
PPF gives better pure returns. Money-back adds an insurance element.
Money back vs Recurring deposit:
RD: 6.5% returns, very safe, complete flexibility. Money back: 5-6% returns, lock-in till maturity, insurance included.
RD is better for pure savings. Money back if you want insurance too.
Tax Angle
Tax deduction:
Premium qualifies under Section 80C up to 1.5 lakhs. Saves tax on investment.
Tax-free maturity:
Survival benefits and maturity proceeds are tax-free if annual premium under 10% of sum assured (or 15% for policies after April 2013).
This tax benefit improves effective returns slightly.
Making Your Decision
Money-back policy isn’t the best savings plan for everyone. But it has a place in specific scenarios. Works if you need periodic cash flow matching goals. Want insurance bundled with savings. Prefer guaranteed returns over market risk. Can afford the premium comfortably for the full term.
Financial planning needs a mix of products. A money-back policy is one tool. Not the only tool. Use it where it makes sense. Skip where it doesn’t.