Money back plans good if you need periodic returns
Nov 16 2015
In life insurance space, money back plans are the most popular ones among traditional investors. This is because of the following benefits:
n They provide insurance and investment with a low risk element
n Under these plans, you get fixed per cent of sum assured at regular intervals, say after every three to five years. The balance sum payable is paid with bonus at the time of death or maturity benefit. Death benefit doesn’t include money already paid as survival benefits during the tenure of the plan
n Tax benefits
Money back plan is designed for individuals who require money at certain intervals in their lifetime to meet fixed long and short-term financial needs like child education, marriage, buying a house/car, vacations and other expenses. It creates a long-term savings opportunity with a reasonable rate of return, especially since the payout is considered exempt from tax except under specified situations.
Traditional life insurance policies promise to give the investor the twin benefits of safe returns and protection. Endowment policies invest in high-quality debt instruments or government securities. This is why they are unable to generate high returns. While the return is abysmally low (5-6 per cent at best), the high premium outgo prevents the policyholder from buying adequate life insurance cover. If we combine tax return and investment return, then also it will give us only 7-8 per cent per annum return.
The low rate of returns from traditional plans is a cause of worry at present. With inflation raging at over 9 per cent, earning a 7-8 per cent return actually amounts to losing money, not earning it. What’s worse is that inflation of some key components is rising faster. Education inflation is at least two times the normal rate of inflation.
Investors rarely take inflation into account while saving for their future. For example, Rs 25 lakh may seem to be sufficient for your son/daughter’s marriage expenses in today’s scenario. But even a moderate inflation of 6 per cent will diminish its value to less than Rs 7.25 lakh in 20 years.
Before selecting any product, one should identify his/her needs like how much cover is required depending on the standard of living and all other financial goals. One should chose those products which are suitable as per the duration of goals and expected returns required to meet the goals.
However, payout intervals are fixed in a money back plan. It may be helpful for crucial life stage planning, but one doesn’t have the flexibility to increase or decrease premiums and have a choice of sum assured to suit growing incomes and changing lifestyle. Also, they don’t have the freedom to change the payout intervals.
One should learn to manage expenses with regular income while in accumulation phase. So, money back plans are suitable to those who actually need periodic return as per financial goals, and not for tax benefits as there are so many other products which give tax benefits as well as flexibility of investment and redemption. Moreover, tax benefits may not be available if the premium in any year exceeds 10 per cent of the sum assured. Though money back plans enjoy tax sops, it should not be the only factor for selecting them.
(The writer, a CFP, is head financial planning, Bajaj Capital)