Financial planning is an area where everyone desires a cushion. But how do you select the best of the lot? With so many financial plans in circulation, a money back policies are usually at the top of its twin advantages of insurance and regular returns. If you are considering whether or not such a savings plan is worth taking up, let us take a look at the details to make a decision.
What is Money Back Policy?
Money back policy is a form of life insurance, which pays periodic installments during the policy duration. Unlike standard life insurance, which pays only at death of the policyholder or at maturity, this policy pays a fraction of the sum assured periodically. The balance is paid as a maturity benefit, providing a constant stream of money during the policy duration.
How Does It Work?
Suppose you buy a 20-year money back policy. According to the contract, you can start getting settlements after five years and then get settlements occasionally until policy maturity. You will get the balance assured sum along with the bonuses earned at the term maturity.
This combination of periodic premiums and a maturity benefit paid in one premium makes the money-back policy the best savings plan for individuals looking towards financial security as well as fulfilling immediate needs.
Advantages of Money Back Policies
Regular Income Stream:
The best feature of having a regular income stream is a policy of money back. These transactions can be put to use towards paying for future expenses like studies, vacations, or investing in other financial tools. For someone with dependents, it is an excellent idea to ensure economic needs are addressed on a recurrent basis.
Risk-Free Returns:
In contrast to market-linked products, money back schemes are immune to the vagaries of the market. Returns are guaranteed, providing cover to investors seeking secure returns rather than risky investments.
Insurance Cover:
Basically, a money back policy is a life insurance policy too. If the policyholder dies, the nominee gets the entire sum assured irrespective of any premiums paid over the tenure. This provides complete financial security for your loved ones.
Tax Advantage:
Premiums paid in respect of a money back policy qualify as tax-deductible under Section 80C of the Income Tax Act. Furthermore, the payments and the maturity proceeds are tax-free in general, hence it is a tax-saving investment scheme.
Drawbacks to be Aware of
Less Returns than Other Investments:
Although the returns are assured, they may be lower than what you can expect from equity-linked savings schemes (ELSS), mutual funds, or other market-linked plans. This is a letdown for risk-takers.
More Premium Cost:
Money back policies are marginally more expensive than term insurance policies or even regular life insurance policies. This can cut into your wallet if you do not keep an eye on things.
Opportunity Cost:
As you are choosing a money back policy, you may also lose out on greater returns if you invested via other savings avenues. You must consider whether the guaranteed returns are actually worth the possible opportunity cost.
Who Should Opt for a Money Back Policy?
A money back policy is not for all. It’s ideal for those who:
- Prefer Low-Risk Investments: If you’re wary of market fluctuations, this policy offers a risk-free way to grow your savings.
- Need Regular Income: For those who require periodic payouts to manage short-term goals or expenses, this plan is ideal.
- Desire Dual Benefits: Because the plan bundles life insurance and savings in a single scheme, it’s appealing to those seeking comprehensive financial solutions.
- Have a Stable Budget: As premium increases, make sure you have enough income to pay the policy without affecting other financial obligations.
Are There Options?
If you are not certain if a money back policy serves your purpose, consider these alternatives:
- Term Insurance with SIP: Invest in a term insurance and a Systematic Investment Plan (SIP) in mutual funds. It is a high life cover with chances of higher returns.
- Endowment Plans: These offer life insurance as well as maturity benefits, albeit without regular payouts.
- Public Provident Fund (PPF): For long-term saving, PPF offers tax-free returns and higher interest rates compared to money back policies.
Assessing the Value of Money Back Policies
To determine if a money back policy is worth the price, ask yourself:
- What are my goals? If you require periodic payments to fund short-term goals, a money back policy is the solution.
- What is my tolerance for risk? If market-linked products are risky, the assured returns of a money back policy can be comforting.
- Am I able to pay the premiums? Premiums need not ruin your budget. Ensure you’re comfortable with the cost.
- Am I maximizing tax advantages? If tax savings are important, the policy will easily find a place in your financial strategy.
Conclusion
Money-back policies are a special combination of saving and insurance. They give security, guaranteed income, and peace of mind, and this is why conservative investors like them so much. They might not suit everybody who wishes for high returns or low-cost insurance, though.
Before investing, consider the advantages and disadvantages about your financial objectives. If necessary, take advice from a financial planner, and never fail to scan the fine print of any policy. The ideal savings scheme works according to your requirements, priorities, and future expectations.
