Advantages and Disadvantages of Money Back Policies

Money back policies offer a combination of life insurance coverage along with savings benefits. While these plans offer a lot of advantages, like any other insurance policy, they also come with their own set of drawbacks that can’t be ignored. 

Here in this blog, we will explain the advantages and disadvantages of money back policy to help you determine if this plan is the right choice for you! 

What Is Money Back Policy? 

Money back policy is a type of life insurance plan that offers insurance coverage along with regular payouts. In this plan, a part of the sum assured gets paid during the policy tenure, which is also known as survival benefit, whereas the rest of the amount gets paid when the policy matures.

In case the policyholder dies, the sum assured will be paid to the nominee, regardless of the fact that Survival Benefits has already been paid. 

Advantages of Money Back Policy

• Offers sum assured

Due to any unfortunate event, if the policyholder dies, the life insurance company pays the lump sum amount of the sum assured to the nominees. This will help to cover up future expenses and offer them financial stability to their lives stress-free. 

• Comes with a low-profile risk

Many investments get affected by market fluctuations, but a money back policy comes with a low risk and guaranteed payouts in regular intervals. Despite what happens in the market, policyholders will get regular incomes and insurance coverage. 

• Tax savings

Under section 80C of the Indian Income Tax Act, tax deductions can be availed on the premium payments. Additionally, the maturity benefits are tax-free under Section 10(10D) of the Act, subject to specific conditions. 

• Life coverage 

Money back policies offer life coverage throughout the policy term and ensure financial security for the family in case of the policyholder’s unfortunate demise.

• Receive returns in a few years of investment 

Unlike traditional plans, the money back policy acts as a regular source of income along with maturity benefits. It is more like an endowment plan that offers returns in a very short time after investing. 

• Additional benefit 

These policies may offer additional benefits to the policyholder in the form of guaranteed additions. 

• Maturity benefit

Although the policyholder receives survival benefits in the form of regular payouts, they also get maturity benefits whenever the policy term ends. It may include declared bonuses, depending on whether you survive the policy term. 

Disadvantages of Money Back Policy

• Lower returns

In comparison to other investment options, the money back policy offers fewer returns. And, the reason behind that is part of the premium getting spent in the form of survival benefits, which results in lower investments and returns. 

• High Premium

The premiums paid under this policy are comparatively higher than those of regular term life insurance. This is because the policy provides survival benefits and a lump sum amount when it matures. 

• Limited coverage

One of the significant disadvantages of this policy is limited coverage. The policyholders who are in need of a higher sum assured, this policy lacks adequate coverage. Along with that, the amount received as survival benefit may be insufficient to meet the financial requirements. 

• Inflation risk

The regular payouts may not rise with inflation. If the cost of living increases, then the fixed payouts might be insufficient to meet the financial goals of a family. 

Suppose a person purchased a policy when inflation was about 2%, but now the regular payouts after the period of 20 to 30 years will have less purchasing power as compared to previous times, meaning a decrease in the real value of returns. 

• Lack of Flexibility

Compared to other life insurance policies, the money back policy lacks flexibility. So, it becomes pretty difficult and expensive to modify or cancel the policy. 

• Opportunity Cost

Funds invested in this policy may offer you great returns if invested elsewhere. Although regular payouts are one of the best advantages; the overall opportunity of these funds is quite limited if compared to other investment options. 

• Insufficient Insurance Component 

The assured amount of life insurance by money back policy might be insufficient to meet the financial needs as compared to the other term insurance policy at the same premium level. It is a point of concern for those who want to offer a secure future to the family members in the case of death. 

Conclusion 

To sum up, money back policy offers benefits like regular payouts and lump sum payments, but at the same time, there are certain disadvantages that one should also consider. 

You must compare the advantages, such as low risk, tax savings, and maturity benefits, against disadvantages, like limited coverage, opportunity cost, and high premiums. This will help you decide whether a money back policy is the right choice for your financial security and goals. Need expert assistance? Get in touch with our insurance advisor at +91-7551196989. 

Frequently Asked Questions (FAQs) 

Ques 1. What are the disadvantages of a money back policy?

Ans. Money back policies have several disadvantages. They offer lower returns, high premiums compared to regular term life insurance, and lack flexibility. 

Ques 2. What are the benefits of a money back policy?

Ans. Money back policies provide regular payouts and life insurance coverage. They are low-risk offer guaranteed returns and tax benefits on the premiums paid and the maturity amount. Plus, policyholders receive a lump sum amount at the end of the policy term.

Ques 3. Is there a lock-in period for money back policies?

Ans. Yes! Money back policies typically have a lock-in period of 3 to 5 years. During this time, investors cannot withdraw the money.

Ques 4. My risk appetite is low. Can I invest in a money back policy? 

Ans. Absolutely, yes! Money back policies are perfect for individuals with a low-risk appetite as these offer guaranteed returns and are not affected by market fluctuations. 

Ques 5. Do money back policies help in tax savings?

Ans. Yes! The premiums paid towards these policies are eligible for tax deductions under Section 80C of the Indian Income Tax Act. Additionally, the maturity benefits received are tax-free under Section 10(10D), subject to specific terms and conditions.