What is a Life Insurance Money Back Policy?

One always likes the idea of insurance with an investment benefit. If one’s focus is survival and survival benefits then a money back policy is the answer. If one wants income obtained at regular time intervals along with an insurance cover then money back is the keyword. Money is always in short supply especially at the time one needs it the most. This is invariably at the time when life’s goals beckon. Perhaps it’s time to buy that brand new car. One’s son wants to do an MBA or one’s daughter’s marriage is at hand. One can certainly turn to a money back insurance policy to achieve one’s dreams.

What is a money back policy?

A money back policy is a traditional life insurance plan where the policy holder is insured for a particular amount called the sum assured on payment of a premium. A percentage of the sum assured is received at pre decided time intervals. This is unlike a regular endowment plan where the sum assured known as the survival benefit is paid out at the end of the tenure of the policy. Policy term is the tenure of the insurance policy and is the time period for which the person is insured. Premium term is the time period for which the policy holder has to pay the premium. The sum assured depends on the premium amounts paid. In addition a policy carries an assured bonus paid out at regular intervals or at the end of the policy term in a participating policy. The bonus is calculated on the full sum assured. An accidental rider or a critical illness rider is available on payment of an additional premium.In case of the death of the policy holder the nominee gets the entire sum assured and the survival benefits earned during the previous terms as money back components when the policy holder was alive are not deducted.

What are the salient features of a money back policy?

• Premiums of a money back policy are paid on a monthly, quarterly, half yearly or a yearly basis.
• The minimum entry age of the policy may be 13 years and the maximum entry age is 50 years.
• The maximum maturity age of a money back policy is capped at 70 years.
• The policy may also have a rider such as an accidental rider obtained on paying an additional premium. In this a part of the sum assured is obtained at short term intervals if the policy holder meets with an accident leading to a permanent disability.
• The premium paid for a money back policy is available for deductions up to an amount of INR 1 Lakh under Section 80 C of the income tax act and the maturity proceeds are tax free under Section 10 (10 D) of the income tax act.
• A money back policy cannot be pledged as collateral for a loan.
• A money back policy has a minimum sum assured of INR 50000 with no upper limit for the sum assured.
• A money back policy has a guaranteed surrender value only after three policy years. This is 30% of all the premiums paid for the first three years excluding the first year’s premium and all survival benefits paid earlier.
• A money back policy may have a tenure of 20 years. In the 5th year 20% of the sum assured is paid to the policy holder .In the 10th year another 20% of the sum assured is paid out, In the 15th year a further 20% of the sum assured is paid. The remaining 40% of the sum assured and the bonus accrued is paid out at the end of the tenure of the policy.
• A participating insurance policy pays up bonus amounts at pre defined time intervals or at the end of the tenure.

How does a money back policy work?

Let us consider Mr Suresh aged 30 years takes a participating money back insurance policy for a sum assured of INR 150000.The tenure of the policy is 20 years. He pays a premium amount of INR 7592 per annum. The policy pays a bonus of 3.5% for the first 7 years and 4.0% for the remaining period compounded annually. A terminal bonus of INR 10000 is paid at the end of the policy term.

Table - 1

Bonus Amounts

The policy pays a bonus amount of 3.5% compounded annually for the first 7 years. This translates to be INR 35 per thousand.
We divide the sum assured by thousand = INR 150000/1000 = 150. Tenure = 7 years.
The bonus amounts can be calculated as :
= (35 * 150 * 7) =INR 36750.

The policy pays a bonus amount of 4.0% compounded annually for the next 13 years. This translates to be INR 40 per thousand.
Tenure = 13 years.

We divide the sum assured by thousand = INR 150000 / 1000= 150.
= (40 * 150 * 13) = INR 78000.
The policy pays a terminal bonus of INR 10000 at the end of the policy period.
The net bonus is INR 36750 + INR 78000 + INR 10000 = INR 124750.

Money Back

• The policy pays Mr Suresh 20% of the sum assured mainly an amount of INR 30000 in the fifth year as a money back which gives this kind of a policy the name money back insurance policy.
• The policy pays Mr Suresh 20% of the sum assured mainly an amount of INR 30000 as money back in the tenth year.
• The policy pays Mr Suresh 20% of the sum assured mainly an amount of INR 30000 as money back in the fifteenth year.

The policy pays up the remaining 40% at the end of the policy term mainly the twentieth year which translates to INR 60000.The bonus amount of INR 124750 is added to this final amount. We add INR 60000 + INR 124750 = INR 184750 as shown in the table.

Total Gain

The Total amount obtained from the money back policy is INR 274750 as shown in the table. The sum total of all the premiums paid over the full tenure of the policy is INR 151840.The net gain is INR 274750 – INR 151840= INR 122910. Mr Suresh takes a money back insurance policy and gains an amount of INR 122910 over a tenure of 20 years.

What are the salient features of a child money back policy?

• The minimum age of entry for a child in a money back policy is 0 years. The maximum age of entry for the child to be eligible for a money back policy is 10-17 years. The premium payments of a money back policy ends when the child attains 18 years of age. The maximum age at maturity may be 24- 26 years.
• The policy might have a minimum sum assured of INR 50000 and there is no upper limit.
• The policy might be tailored such that 20-25 % of the sum assured is paid when the child attains 18-20 years. Another 20-25% of the sum assured is paid when the child attains 21-22 years of age .Another 20-25% of the sum assured is paid when the child attains 23-24 years of age. The final amount about 25-40% along with loyalty bonus and guaranteed addition is paid when the child attains 26 years of age.
• These kinds of policies have riders obtained on paying an additional premium. These policies have a term rider where the nominee would get an amount equal to the sum assured or a pre determined term rider sum may be obtained. A critical illness rider as well as an accidental death benefit rider may also be obtained. These polices have a waiver of premium benefit. At the time of the death of the parent the sum assured is paid immediately. All future premiums are borne by the insurance Company itself and at various pre defined time intervals as well as the maturity of the policy amounts are paid to the child. These kind of polices are called twin benefit policies.

I would like to end this article stating that a children’s money back policy is very essential for the education of one’s child. However it is always good to check the premium amounts and read the policy fine print carefully. Always make use of rider benefits in these polices to get additional benefits. These policies provide benefits at various pre defined time intervals which make them better than endowment polices. However the low rate of return on these polices as well as no flexibility to change the sum assured or increase or decrease the premium amounts paid is a drawback of a money back policy.