Spend, Save and Invest Smartly
One always likes the idea of insurance with an investment benefit. If one’s focus is survival and survival benefits then a money back policy is the answer. If one wants income obtained at regular time intervals along with an insurance cover then money back is the keyword. Money is always in short supply especially at the time one needs it the most. This is invariably at the time when life’s goals beckon. Perhaps it’s time to buy that brand new car. One’s son wants to do an MBA or one’s daughter’s marriage is at hand. One can certainly turn to a money back insurance policy to achieve one’s dreams.
A money back policy is a traditional life insurance plan where the policy holder is insured for a particular amount called the sum assured on payment of a premium. A percentage of the sum assured is received at pre decided time intervals. This is unlike a regular endowment plan where the sum assured known as the survival benefit is paid out at the end of the tenure of the policy. Policy term is the tenure of the insurance policy and is the time period for which the person is insured. Premium term is the time period for which the policy holder has to pay the premium. The sum assured depends on the premium amounts paid. In addition a policy carries an assured bonus paid out at regular intervals or at the end of the policy term in a participating policy. The bonus is calculated on the full sum assured. An accidental rider or a critical illness rider is available on payment of an additional premium.In case of the death of the policy holder the nominee gets the entire sum assured and the survival benefits earned during the previous terms as money back components when the policy holder was alive are not deducted.
Let us consider Mr Suresh aged 30 years takes a participating money back insurance policy for a sum assured of INR 150000.The tenure of the policy is 20 years. He pays a premium amount of INR 7592 per annum. The policy pays a bonus of 3.5% for the first 7 years and 4.0% for the remaining period compounded annually. A terminal bonus of INR 10000 is paid at the end of the policy term.
Table - 1
The policy pays a bonus amount of 3.5% compounded annually for the first 7 years. This translates to be INR 35 per thousand.
We divide the sum assured by thousand = INR 150000/1000 = 150. Tenure = 7 years.
The bonus amounts can be calculated as :
= (35 * 150 * 7) =INR 36750.
The policy pays a bonus amount of 4.0% compounded annually for the next 13 years. This translates to be INR 40 per thousand.
Tenure = 13 years.
We divide the sum assured by thousand = INR 150000 / 1000= 150.
= (40 * 150 * 13) = INR 78000.
The policy pays a terminal bonus of INR 10000 at the end of the policy period.
The net bonus is INR 36750 + INR 78000 + INR 10000 = INR 124750.
The policy pays up the remaining 40% at the end of the policy term mainly the twentieth year which translates to INR 60000.The bonus amount of INR 124750 is added to this final amount. We add INR 60000 + INR 124750 = INR 184750 as shown in the table.
The Total amount obtained from the money back policy is INR 274750 as shown in the table. The sum total of all the premiums paid over the full tenure of the policy is INR 151840.The net gain is INR 274750 – INR 151840= INR 122910. Mr Suresh takes a money back insurance policy and gains an amount of INR 122910 over a tenure of 20 years.
I would like to end this article stating that a children’s money back policy is very essential for the education of one’s child. However it is always good to check the premium amounts and read the policy fine print carefully. Always make use of rider benefits in these polices to get additional benefits. These policies provide benefits at various pre defined time intervals which make them better than endowment polices. However the low rate of return on these polices as well as no flexibility to change the sum assured or increase or decrease the premium amounts paid is a drawback of a money back policy.