Did you know that choosing the right life insurance plan can be like picking the perfect pizza topping? It’s all about finding the one that suits your taste, or in this case, your financial needs. There are so many different options to choose from when it comes to life insurance, and it can be hard to know which one is best for you.
Today, let’s dive into the two best life insurance plans: Term Plan and Money-Back Plan. It’s not just about protecting your loved ones; it’s about understanding the essentials of these two plans and making a choice that fits your lifestyle.
Table of Contents
Understanding Term Plans
Term insurance plans are a type of life insurance plan that provides coverage for a specified term or duration. These plans are designed to offer financial protection to the policyholder’s beneficiaries in the event of the policyholder’s death during the coverage period. Term insurance plans offer coverage for a specific term, which can range from 5 to 30 years or more.
If the policyholder expires during this period, the nominee of the policy will receive the death benefit. No benefit will be paid to the policyholder if he/she survives the policy term. Term insurance has become the most famous life insurance policy in recent years due to the coverage offered under the term insurance and the premium associated with it.
How Does Term Plan Work?
Let’s go through an illustrative example to understand how a term insurance plan works:
- Policyholder: Mr. Suresh
- Age: 30-year-old
- Sum Assured: Rs.1 Crore
- Policy Term: 20 years
- Premium Amount: Rs.10,000 per year
Death Benefits:
In the unfortunate event of Suresh’s demise during the policy term, the nominees or beneficiaries will receive the sum assured, i.e., Rs. 1 Crore.
Maturity Benefits:
Term insurance plans do not offer any maturity or survival benefit if the policyholder survives the entire term. Unlike traditional life insurance policies, there is no payout at the end of the policy term.
Note: Term plans are generally more affordable compared to other life insurance products because they focus solely on providing a death benefit.
What are the Benefits of Term Insurance Plans
Here are some key benefits of term insurance plans:
- Financial Protection for Dependents: The primary purpose of term insurance is to provide financial protection to the family or dependents of the policyholder in the event of the policyholder’s demise.
- Affordable Premiums: Individuals can get a high-value life cover from a term insurance plan by paying an affordable premium amount. This is particularly beneficial for those looking to maximize their life coverage within a limited budget.
- Customizable: Term plans offer flexibility in choosing the policy term and premium payment term. Policyholders can select a term that aligns with their specific financial needs and the duration of their financial responsibilities, such as children’s education or loan repayments.
- Tax Benefits: Premiums paid towards term insurance plans are eligible for tax benefits under Section 80C of the Income Tax Act, up to a specified limit. Additionally, the death benefit received by the nominee is generally tax-free under Section 10(10D), subject to conditions.
- Option for Riders: Some term plans offer additional riders or add-on benefits that can be attached to the base policy for an extra cost. Common riders include critical illness riders, accidental death riders, and waiver of premium riders, providing additional coverage in specific situations.
- Ease of Purchase: Term plans are readily available online, and the application process is often streamlined. Individuals can purchase term insurance easily and quickly through various online platforms.
Understanding Money Back Plans
Money-back plans, as the name implies, return the invested money to the policyholder. These plans are a combination of insurance and investment, providing both protection and periodic payouts. In a money-back policy, the policyholder can get a certain percentage of amounts at regular intervals, instead of getting the lump sum amount at the end of the term. It can be termed as the Endowment Life Insurance Plan with a liquidity option.
The money-back plan also provides a sum assured to the nominee of the insured at the time of death of the policyholder or on the maturity of the policy apart from the money withdrawn at regular intervals. A money-back policy is preferred by those people who are looking for regular payouts during the policy period in addition to the death benefit.
Also Read: Endowment Life Insurance Plan
How Does a Money Back Plan Work?
Let’s consider an example to illustrate how a money-back plan works:
- Policyholder: Mr. Kumar
- Sum Assured: Rs.5 Lakhs
- Policy Term: 20 years
- Premium Payment Term: 15 years
- Premium Amount: Rs.25,000 per year
Key Features:
- Survival Benefits: The money-back plan offers 20% of the sum assured as survival benefits every 5 years.
- Maturity Benefit: The remaining sum assured along with any bonuses is paid at the end of the policy term.
- Death Benefit: In case of Kumar’s demise during the policy term, the full sum assured is paid to the nominee.
Survival Benefits and Maturity Benefits:
- Year 5 (First Survival Benefit): Kumar receives 20% of the sum assured: Rs. 1 Lakh
- Year 10 (Second Survival Benefit): Kumar receives 20% of the sum assured: Rs. 1 Lakh
- Year 15 (Third Survival Benefit): Kumar receives 20% of the sum assured: Rs. 1 Lakh
- Year 20 (Maturity): At the end of the policy term, Kumar receives the remaining sum assured: Rs. 2 Lakhs
Total Benefits Received by Mr. Kumar:
- Survival Benefit: Rs. 1 Lakh (Year 5) + Rs. 1 Lakh (Year 10) + Rs. 1 Lakh (Year 15) = Rs. 3 Lakhs
- Maturity Benefit: Rs. 2 Lakhs
Death Benefits:
If Kumar, unfortunately, passes away in the 16th Year, his nominee would receive the full sum assured of Rs. 5 Lakhs regardless of the survival benefits (Rs. 3 Lakhs) already paid.
What are the Benefits of Money-Back Plans
Money-back plans offer several benefits, making them attractive to individuals looking for a combination of insurance coverage and periodic returns. Here are some key benefits of money back plans in India:
- Periodic Payouts: One of the primary advantages of money-back plans is the regular payout of a percentage of the sum assured at predefined intervals during the policy term. This provides the policyholder with liquidity and financial support at various stages of life.
- Life Coverage: Money-back plans provide life insurance coverage, ensuring financial protection for the family in the event of the policyholder's demise during the policy term. The full sum assured is paid to the nominee, irrespective of the earlier survival benefits received.
- Maturity Benefit: If the policyholder survives the entire policy term, they receive the remaining sum assured along with any accrued bonuses or guaranteed additions as the maturity benefit. This can serve as a financial cushion during retirement or other planned expenses.
- Bonuses: Some money-back plans offer bonuses, which can enhance the overall returns. These bonuses are declared by the insurance company based on its financial performance.
- Flexibility in Premium Payment: Policyholders may have the flexibility to choose from various premium payment options, such as regular premium or single premium, based on their financial preferences.
- Tax Benefits: Premiums paid on money-back plans are eligible for tax benefits under Section 80C of the Income Tax Act, and the maturity amount or death benefit received is generally tax-free under Section 10(10D), subject to conditions.
- Risk Mitigation: Money-back plans can be suitable for risk-averse individuals as they combine life insurance with periodic returns, providing a balance between protection and investment.
Key Differences between Term Plans and Money Back Plans
Here is the table of term plan with money back plan comparison: -
| Feature |
Term Insurance Plans |
Money-Back Plans |
| Purpose |
Provides pure life coverage and financial protection. |
Combines insurance coverage with periodic returns. |
| Premiums |
Generally lower premiums for higher coverage. |
Premiums are relatively higher due to savings and returns. |
| Policy Term |
Typically, long policy terms, typically 10 to 40 years. |
Medium to long policy terms, usually 15 to 25 years. |
| Survival Benefits |
No survival benefits |
Provides periodic payouts (survival benefits) during the policy term. |
| Maturity Benefit |
No maturity benefit, and no payout if the policyholder survives the term. |
Maturity benefit paid if the policyholder survives the term |
| Death Benefit |
Pays the sum assured to nominees in case of the policyholder’s death. |
Pays the sum assured along with accrued bonuses to nominees. |
| Savings/Investment |
No savings or investment component it only focuses on risk coverage. |
Includes a savings or investment component with periodic returns. |
| Liquidity |
No liquidity during the policy term primarily focused on protection. |
Provides liquidity through periodic payouts during the policy term. |
| Tax Benefits |
Premiums paid and death benefits are eligible for tax benefits under Section 80C and 10(10D). |
Premiums paid and maturity/death benefits may be eligible for tax benefits. |
| Suitable for? |
Suited for those seeking maximum coverage at a minimal cost. |
Suited for individuals seeking a combination of insurance and savings with periodic returns. |
Money Back Policy Vs Term Insurance Policy - Which is the Best Option?
The choice between a money-back plan and a Term Insurance plan depends on individual financial goals, priorities, and preferences. Each plan has its own set of pros and cons. If your primary objective is to provide financial protection for your loved ones in the event of death, a Term Insurance plan is often the better choice due to its higher coverage at lower premiums. If you seek a combination of insurance coverage and periodic returns, along with the opportunity for savings, a money-back policy may be suitable. For better choice advice, it’s recommended to compare quotes at PolicyBachat to determine the most appropriate plan based on the specific circumstances.