Are you seeking the best life insurance plan for long-term savings and financial protection? Regarding life insurance, two of the most popular options are Endowment Plan and Money Back Plan. Both these policies come with their own set of benefits and drawbacks.
In this article, we’ll delve into these two popular plans to help you make an informed choice that aligns with your financial goals and circumstances. Each of these plans has its unique features, advantages, and drawbacks, making it essential to understand them thoroughly before committing to a policy.
Table of Contents
What is Endowment Plan?
An endowment plan is a financial product that combines life insurance with savings or investment components. It is a type of life insurance policy that provides coverage for a specified period. Endowment Life Insurance Plans are typically sold with a fixed term, such as 10, 15, or 20 years and more. During this time, the policyholder makes regular payments to the insurance company.
If the policyholder dies before the end of the policy term, their beneficiaries will receive the lump sum amount as a death benefit. However, if the policyholder survives the term of the policy, the insurance company pays out a predetermined sum assured plus any accumulated interest as a maturity benefit.
How Does Endowment Plan Work?
Example case scenario on How an Endowment Plan Will Work:-
| Name |
Murali |
| Age |
30-years |
| Sum Assured |
Rs.10 Lakhs |
| Policy Term |
20 Years |
| Premium Payment Term |
15 Years |
| Premium Payment Frequency |
Annual |
| Premium Amount |
Rs.45000 |
Note: Premiums may vary based on the data entered by the policyholder. To get the exact premium rates, compare quotes at PolicyBachat.
Death Benefits:
In the unfortunate event of Murali’s demise during the policy term, the nominees or beneficiaries will receive the sum assured, i.e., Rs. 10 Lakhs.
Maturity Benefits:
If Murali survives the entire policy term, he will receive the maturity benefit. The maturity benefit typically includes the sum assured plus any bonuses or returns generated by the investment component. Let’s assume that, at the end of 20 years, the maturity benefit is Rs. 10 Lakhs + 1.5 Lakhs (Bonuses).
Benefits of Endowment Policy
Here are the benefits of an endowment policy:-
- Financial Security: An endowment policy provides financial security by offering life coverage during the policy term. It provides a death benefit to the policyholder’s beneficiaries in case of the insured person’s death during the policy term.
- Savings or Investment Component: In addition to the life insurance component, 10-year endowment policies also have a savings or investment element. Part of the premium paid by the policyholder goes towards building up a cash value over the policy’s term.
- Surrender Value: If the policyholder decides to surrender the policy before the maturity date, there may be a surrender value, which is the amount payable by the insurance company. The surrender value is often less than the total premiums paid.
- Maturity Benefit: Unlike pure term insurance policies where there is no maturity benefit if the policyholder survives the term, endowment policies provide a maturity benefit. This is the sum assured along with bonuses or returns on the investment component, which is paid out to the policyholder at the end of the policy term.
- Tax Benefits: Premiums paid towards endowment life insurance policies are often eligible for tax benefits under Section 80C of the Income Tax Act. Additionally, the maturity amount or death benefit received may also be tax-free under Section 10(10D) of the Income Tax Act, subject to certain conditions.
- Loan Facility: Many endowment policies offer the option to take a loan against the policy’s cash value. This can be useful in times of financial need.
- Bonus Additions: Depending on the performance of the insurance company, endowment policies may offer annual bonuses. These bonuses can enhance the overall returns of the policy.
What is a Money-back Plan?
Money-back plans, as the name suggests, 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.
How Does Money-back Policy Work?
Let’s consider an example to illustrate how a money-back plan works:
| Name |
Satish |
| Age |
35-years |
| Sum Assured |
Rs.10 Lakhs |
| Policy Term |
20 Years |
| Premium Payment Term |
15 Years |
| Premium Payment Frequency |
Annual |
| Premium Amount |
Rs.35000 |
Note: The premiums may vary based on various factors, including the policyholder’s age, health, the type of coverage, and the duration of the policy.
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 Satish'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) |
Rs. 2 Lakhs |
| Year 10 (Second Survival Benefit) |
Rs. 2 Lakhs |
| Year 15 (Third Survival Benefit) |
Rs. 2 Lakhs |
| Year 20 (Maturity Benefit) |
Rs. 4 Lakhs+(Bonuses if any) |
Death Benefits:
If Satish, unfortunately, passes away in the 16th Year, his nominee would receive the full sum assured of Rs. 10 Lakhs regardless of the survival benefits (Rs. 6 Lakhs) already paid.
Benefits of Money Back Policy
Here are some key benefits of money-back plans in India:
- 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.
- 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.
- Flexibility in Premium Payment: Policyholders may have the flexibility to choose from various premium payment options, such as regular premium limited pay, 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.
- 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.
Difference between Endowment Plan Vs Money Back Plan
Here is the comparison table of endowment policy vs money-back policy:
| Feature |
Endowment Plan |
Money-Back Plan |
| Purpose |
Provides both insurance coverage and savings. |
Provides periodic payouts during the policy term. |
| Death Benefit |
A lump sum amount is paid to the nominee in case of the policyholder’s death during the policy term. |
Periodic survival benefits are paid even if the policyholder survives the entire term. In case of death, the total sum assured is paid irrespective of the survival benefit already paid. |
| Maturity Benefit |
A lump sum amount along with bonuses is paid to the policyholder upon policy maturity. |
Periodic payouts are received during the policy term, and the balance is paid at maturity if the policyholder survives. |
| Premiums |
Higher premiums compared to money-back insurance policies due to the savings component. |
Premiums are generally higher than term insurance but lower than endowment plans. |
| Cash Value |
Accumulates a cash value over time. Policyholders may be eligible for loans against this value. |
Provides periodic returns during the policy term and has a cash value, but the cash value might be lower compared to an endowment plan. |
| Flexibility |
It offers flexibility in premium payment terms. |
It also offers flexible premium payment terms. |
| Tax Benefits |
Premiums paid and maturity/death benefits may be eligible for tax benefits under Section 80C and 10(10D). |
Premiums paid and maturity benefits may be eligible for tax benefits under Section 80C and 10(10D). Survival benefits are generally tax-free. |
| Ideal For |
Individuals looking for a combination of insurance and long-term savings. |
Individuals who want periodic liquidity along with insurance coverage. |
Money Back Policy Vs Endowment Policy - Which Is Better Choice?
The choice between an endowment plan and a money-back plan depends on your financial goals, preferences, and needs. Both types of insurance plans have their advantages and drawbacks. Ultimately, individuals should carefully assess their financial objectives, risk tolerance, and liquidity needs before choosing between an endowment plan and a money-back plan. It's recommended to read the policy terms and conditions thoroughly, considering factors such as the sum assured, bonuses, and any additional features offered by the insurance provider. Comparing quotes online at PolicyBachat can help in making an informed decision based on individual circumstances.