Money Back vs Term Insurance: Which Is the Better Investment Plan?

While looking for a secure future, considering different plans becomes necessary. Money-back policies & term plans are the two most popular options when it comes to select a right Investment Plan, each having its own pros & cons. The choice depends on the priorities of an individual, & as both plans include an insurance component, they will need more study to make an informed decision. If an individual needs a pure protection plan at an affordable cost, opt for a term plan. But, if you want to avail the benefits of both insurance & investment, a money-back policy will best suit you. 

What is a Money Back Plan?

A money-back plan includes dual benefits of insurance & investment, where the amount invested is returned to the policyholder. This includes periodic payouts, i.e. survival benefits along with the maturity benefits. It best suits those individuals looking for short-term investment options, financial security, & regular payments.  

How Does a Money Back Plan Work?

Presume Mr X, a policyholder, buys a money-back plan with a sum assured of INR 5 lakhs, tenure of 20 years. This plan includes a premium amount of INR 25,000 annually with a premium payment tenure of 15 years. Provided would be the benefits:

1. First Survival Benefit: Mr X will receive INR 1 lakh, i.e. 20% of the sum assured in Year 5.
2. Second Survival Benefit: Mr X will receive INR 1 lakh, i.e. 20% of the sum assured in Year 10.
3. Third Survival Benefit: Mr X will receive INR 1 lakh, i.e. 20% of the sum assured in Year 15.
4. Maturity Benefit: Mr X will get the remaining sum assured of INR 2 lakhs at the end of the policy tenure.
5. Death Benefit: If Mr X dies in the 16th year, their beneficiaries will receive the complete sum assured of INR 5 lakhs, irrespective of INR 3 lakhs already being paid as survival benefits.

What is a Term-Insurance Plan?

A term plan is a type of life insurance plan which provides life coverage for a specific tenure, where the policyholder chooses the sum assured. This plan provides death benefits to the nominees of the policyholder in case of their death, hence offering financial protection. The policyholder gets financial coverage over the insured’s life in exchange for the premium paid.

How Does a Term Plan Work?

Presume Mr X, a 30-year old policyholder, buys a term plan with a sum assured of INR 1 crore, tenure of 20 years. This plan includes a premium amount of INR 10,000 annually. The benefits would be the benefits.

• Maturity Benefit: This plan does not include any survival or maturity benefits if the policyholder survives the plan.
• Death Benefit: The beneficiaries will get the entire sum assured of INR 1 crore in case of the sudden demise of Mr X.

While deciding on the amount of sum assured, an individual can use a Lumpsum Calculator to calculate the amount of coverage required to provide financial protection to the family members in their absence. This helps them well align their financial objectives with the amount of sum assured.

Difference between Money Back Plan Vs. Term Plan

Let us examine the differences between them to gain a deeper understanding & make an informed choice.

Choose a Term Plan if:

One should choose a term plan if:

• You are looking for a huge coverage at a cheaper & more affordable cost.
• Your main goal is to provide financial security to the family members in your absence.
• Your main investments are made in some other avenues to seek higher returns.

Choose a Money Back Plan if:

One should choose a money-back plan if:

• You are looking forward towards dual benefit of insurance & investment.
• You are looking for a low-risk savings option along with life coverage.
• You are looking forward to periodic payout to fulfil short-term financial objectives.

Conclusion

Both the plans, namely the term plan & a money-back plan, have their own attributes & features, letting you meet the financial objectives. One should understand the differences between the two plans to choose one between the two that best suits their financial requirements, risk tolerance level, & investment horizon. Where a term plan, on the one hand, offers a pure insurance plan at an affordable cost, a Money Back plan, on the other hand, is a combination of insurance & investment. An investor should hence evaluate their financial objectives, consult a financial advisor to guide them through & choose the plan that best suits their financial objectives.

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