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Home > Business > Special

Should you buy money-back policies?

Sunil Dhawan and Bridget S Leena, Outlook Money | November 24, 2006

At one time, money-back plans were popular because of the periodic payouts that they gave. To be fair to these products, they would have to be judged in the context of government-controlled market with limited investment options.

In fact, LIC was the only institution to offer long-term, risk-free financial products for decades. After the entry of funds and private insurance companies, investment options have increased, making these plans redundant.

Money-back plans can be defined as endowment plans that periodically return a certain percentage of the sum assured instead of waiting till the end of term. In an era of limited options, this kind of packaging and structuring was popular with investors.

But today, money-back policies look expensive. Consider this: if a 30-year-old takes a policy of Rs 10 lakh (Rs 1 million) sum assured for a tenure of 15 years, the annual premium paid would be Rs 89,670 for a money-back policy, while it would be Rs 65,070 for an endowment policy.

It gets worse if we look at buying a term policy of Rs 10 lakh and investing the difference of the premium in a risk-free PPF account that gives eight per cent return. However, for a risk-averse individual who is looking for liquidity by saving in an insurance plan, a money-back policy is the answer.

While the individual keeps getting a percentage of the sum assured during the lifetime of the policy. The percentage, the number of instalments, and the intervening period between instalments depend on the term and the policy opted for. If a policyholder outlives the term, he gets the remaining corpus with accrued additions like bonus.

If he dies before the full term of the policy, his nominee or legal heirs get the insured sum, irrespective of the number of instalments received, with the accrued benefits. Most insurance companies offer money-back polices and many package these as children's education plans to offer tailor-made solutions.

A money-back policy also takes a beating in terms of returns and performance. Look at it only as a forced saving tool and it works only if you reinvest the money returned at regular intervals. Or, use it to make big-ticket purchases that would have otherwise cost you a loan. On the insurance front, you could be underinsuring yourself by opting for one.

Tax kick: Same as for endowment policy.

PPF Rules
Rather than a money-back plan, buy a term plan for the same cover and put the difference between the two premiums in PPF
 Money BackTerm PlanPPF
Sum assured (Rs)8,00,0008,00,000Nil
Term (years)151515
Annual premium/deposit (Rs )71,7662,32669,440a
Cash inflow-5th year (Rs )2,40,000NANA
Cash inflow-10th year (Rs )2,40,000NANA
At end of 15 years (Rs )9,20,000c018,85,000b
Internal rate of return (%)608
aDifference in outflow   bDifference invested annually in PPF @ 8% for 15 years, yields   cBonus assumed @ Rs 50 per Rs 1,000 of sum assured

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Number of User Comments: 2

Sub: Money - back policy

Excellent article. I was planning to go in for money-back policy this week but now in fix. I'm 44. What would be the right kind ...

Posted by S.S. Nayyar

Sub: difference between money back policy and ppf

please differenciate rs.50000/-between money back and ppf also rs.100000/-for twenty years

Posted by rakesh



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