Money Back Insurance in Life Insurance

Overview of Money Back Life Insurance Policy

 

There are different types and variations of life insurance policies available in India. Most of these plans pay a lump sum benefit either on the premature demise or on maturity. But what if you wanted regular returns at specified intervals within the policy tenure? This is where a money back policy comes into the picture.

Money back policies are traditional, savings-oriented life insurance plans . Under these plans, you get money-back benefits in which case a part of the sum assured is paid to you at specified intervals during the policy tenure. Money-back plans, thus, provide the benefits of insurance protection, liquidity and savings creation within the policy tenure.

 

How A Money Back Life Insurance Policy Works?

 

When you buy a money back policy, you choose –

• The sum assured
• The policy tenure
• The premium paying term and frequency, etc.

Based on these details, your age and other risk factors, the premium is determined. You pay the premium for the chosen tenure. As the policy runs, the money-back benefit is paid at predefined intervals and a predefined amount. If the life assured   happens to die during the policy tenure, the death benefit is completely paid irrespective of the total amount of money-back benefits paid before death. If the life assured happens to survive the plan tenure and all the money-back benefit is paid, the rest of the sum assured is paid along with a bonus (if applicable if the policy is issued as a participating policy) and the coverage is terminated.

 

Examples of Money Back Policy

 

For instance, consider Mr. Verma buys the following money back policy –

Here are the benefits that he would get –

 

Features of Money Back Life Insurance Policy

 

Some of the salient features of a money back policy are as follows –

• The policy is a traditional life insurance policy which pays guaranteed^* money-back benefits.
• money-back benefits are paid at specified intervals during the policy tenure.
• In many policies bonus is added to the plan benefits to enhance the overall corpus.
• Coverage is allowed for the full sum assured in the case of the life assured’s death even if money-back benefits have been paid prior to the death.
• The policy offers optional riders which can be added to enhance the scope of coverage. Riders are available at additional premiums.

 

Benefits of A Money Back Life Insurance Policy

 

Some of the benefits of a money-back insurance policy are as follows -

1. Death benefit

In the case the life assured passes away during the policy tenure, a death benefit is paid. This benefit is not reduced by the money-back benefits that have already been paid before death. This helps the family take care of the financial strain that might have been incurred due to the untimely passing of the life assured.

2. Maturity benefit

If the life assured survives the policy tenure, the remaining sum assured is paid along with any bonus if the plan is a participating one. The maturity benefit  gives the policyholder funds to meet his financial needs and also fulfil the goals that he might have.

3. Survival benefit

Survival benefit is the money-back benefit which is paid at specified intervals during the policy tenure. These benefits help the policyholder meet whatever financial needs he might have.

4. Liquidity

The payment of money-back benefits provides liquidity to the policyholder enabling him to access funds after short intervals.

5. Bonus adds to your savings

If you choose a participating money back policy, the bonus additions enhance the corpus and help you save more for your financial goals.

6. Tax benefit 

Money-back plans, like other life insurance plans, help in saving taxes on investments as well as on the benefits. Here’s how –

• The premium paid for the policy is allowed as a deduction under Section 80C of the Income Tax Act, 1961 (the ‘Act’) up to ₹1.5 lakhs. The premium should be up to 10% of the capital sum assured if you have bought the policy on 1st April 2012 or after that. In the case of policies bought before this date, the premium should be up to 20% of the capital sum assured. If you are suffering from a disability or disease mentioned under Section 80U or Section 80DDB of the Act and you buy the policy on 1st April 2013 or after that, the premium should be up to 15% of the capital sum assured. Any excess premium would be taxed1.
• The death benefit is always tax-free².
• The money-back benefits and the maturity benefit are tax-free under Section 10(10D) of the Act, provided the premium paid is within 10%, 15% or 20% of the sum assured. Moreover, if you buy the policy on or after 1st April 2023 with annual aggregate premium more than Rs. 5 lakhs, gains from policy will be taxable whether the premium paid is 10%, 15% or 20% of the sum assured.  
• Further w.e.f. 1 April 2023, if deduction under Section 80C is claimed on the premium paid, this premium amount will not be available for deduction while calculating income from policy. For e.g. Premium amount paid is Rs. 6 lakhs per year under a policy and customer has claimed deduction under Section 80C of maximum permissible amount of Rs. 1.50 lakhs. In such scenario, customer can claim remaining Rs. 4.50 lakhs premium paid as deduction while calculating income from policy and not Rs 1.50 lakhs which were already claimed as deduction under section 80C of the Income Tax Act, 1961   .

 

How to Choose a Money Back Policy?

 

When choosing a money back policy, here are a few points that you should keep in mind to find the right plan –

1. Your financial goals

It is recommended to buy a plan that aligns with your financial goals so that you would have the funds needed to fulfil them and that too at the right time.

2. The money-back frequency

The money-back frequency is also an important consideration. This depicts the payout interval and helps you plan for your goals accordingly.

3. The money-back amount

Assess the money-back amount that you are getting from the plan. It should be sufficient to meet your needs.

4. The sum assured

The sum assured is the amount based on which the money-back benefits and the death benefit are calculated. So, it should be optimal so that it can fulfil your goals.

5. The policy tenure

Choose a tenure that matches your investment horizon. For instance, if you want to plan for your child’s future and your child is a newborn, you can choose a tenure of 18 to 20 years to accumulate the funds needed when your child grows up.

6. Participating or non-participating policy

Participating money-back plans offer bonus additions, if declared by the insurance company, which enhance the maturity and death payouts. So, you may consider opting for a participating money back policy for higher benefits.

 

Eligibility Criteria for Buying a Money Back Policy

 

The eligibility criteria for buying a money back policy varies across plans. However, some of the common parameters, just like other life insurance plans, are as follows

1. There is a minimum and maximum age limit to buy the money back plan. It may vary from insurer to insurer

2. You need to choose a suitable premium payment mode and policy term and pay the premium in accordance with the policy guidelines.

3. Income of the applicant is also an important factor of consideration when buying money back plans. Individual should have a stable income flow and must be capable of paying the premium on time

4. There are some important documents required to purchase money back plans. Details of documents required are in the section below.

 

Documents Required for Buying a Money Back Policy

 

The requirement of documents also depends on the policy that you buy, the sum assured chosen, your age, premium amount, etc. However, some of the common documents include the following³ –

• Address proof like your Aadhaar card, driving license, voter’s ID card, passport, etc.
• Age proof like your Aadhaar card, voter’s ID Card, passport, driving license, PAN Card etc.
• Income proof like your Salary slips, income tax returns, bank statement, etc.   

 

Things to Know Before Buying a Money Back Policy

 

Some of the facts to know before buying a money back policy are as follows –

• The policy does not offer market-linked returns.
• If you choose a participating policy, the bonus, if declared, will be paid only on maturity or premature demise.
• Once the assured passes away, the policy terminates.
• Some plans allow you the option to defer the money-back benefit. The deferred benefit earns interest and grows over the deferment period.
• If the plan matures, the money-back benefits paid during the tenure would be reduced from the maturity benefit and the remaining amount would be paid.

 

Conclusion

 

If you are looking for a life insurance policy which offers regular returns, insurance coverage and liquidity over the policy tenure, a money back policy can be a good choice. Understand how the policy works and choose one which aligns with your financial goals. Invest in a suitable plan and fulfil your goals at the right time with the money-back benefits that you get.

 

FAQs

 

1. Can I surrender a money back policy before the maturity date

Yes, you can surrender a money back policy before the maturity date. However, the surrender can be availed provided a minimum of 2 full year premiums have been paid, subject to the terms and conditions of the policy. . On surrender, you get a surrender value and the policy is terminated.

2. What happens if I miss paying premiums on my money back policy? 

You get a grace period to pay the missed premium. If you do not pay the outstanding premium even during the grace period, the policy lapses. If the minimum number of premiums have been paid, it turns into a paid-up policy. A paid-up money back policy offers a reduced maturity or death benefit. Moreover, the money-back payouts are also reduced.

3. Is a money back policy suitable for long-term financial planning? 

Money-back plans usually come with a long-term tenure so that you can plan for your long-term financial goals and also enjoy liquidity during the tenure. Thus, you can choose money-back plans for long-term goal planning.

Reference

1 https://incometaxindia.gov.in/tutorials/20.%20tax%20benefits%20due%20to%20health%20insurance.pdf

2 https://www.livemint.com/money/personal-finance/how-life-insurance-policies-are-taxed-11665145664260.html

3 https://www.coverfox.com/life-insurance/money-back-policy/

Basic information gathered from -

https://timesofindia.indiatimes.com/business/faqs/banking-faqs/what-is-money-back-plan-its-needs-and-benefits/articleshow/62984850.cms

https://www.outlookmoney.com/talking-money/understanding-the-basics-of-money-back-policy-2894

https://www.moneycontrol.com/investor-education/insurance/classroom/what-is-money-back-plan-1022473.html?classic=true

https://www.insuranceinstituteofindia.com/downloads/IC38/ALEnglish.pdf

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