In the tug-of-war between best protection and regular payouts with protection, there is no clear winner as each has its own benefits and drawbacks. Today let’s try to find out what is best for you and how!
“Aam Ke Aam aur Guthliyon Ke Daam”, is the best way of describing the mindset of an average Indian. We Indians are best known for extracting out everything we use until the very end, and then some more. This stays true for many things, be it daily use articles or other instruments including protection.
We want our protection plans to perform its primary responsibility of providing for our family in the absence of their sole breadwinner. In case you survive the term of the protection plan, we want our investment back and in turn, if we get something over and above that, our joy and happiness knows no bounds.
Distributors and Agents of Life Insurance companies operating in India have correctly got hold of this tendency and have been actively manipulating it for pushing life insurance products with savings and investment components, particularly they insist on adding money back insurance plan to their customer’s portfolio. People think they have made a smart choice and are quite sure about their decision of buying a money back plan as the optimal FREE Life Insurance Plan. This mindset makes term plans less popular, especially, among the middle-class people as nothing is paid back in the end as a maturity benefit. So, before we begin the tug-of-war to find out what is best for you and how, let’s meet the challenges without any further ado:
In the red corner, we have,
Term Life Insurance
- A pure protection life insurance plan with very high sum assured for a nominal premium
- Entire sum assured is paid to the nominees on the death of the life assured
- In case the life insured survives the defined term of the policy nothing is paid back
In simpler terms, a term life insurance plan is your perfect companion that looks after your family in case something happens to you. It helps your family by taking over your financial responsibilities. It supports your family members to maintain the standard of living even in the absence of the sole breadwinner.
In the blue corner, we have,
Money Back Life Insurance Plan
A variant of endowment plan with life cover for the defined term of the policy.
On surviving the defined period of intervals, the insured person gets back a particular percentage of his sum assured as survival benefit payout or in simpler terms Money Back.
On completion of the policy term, the last instalment of payout is made. Generally, money back plans also offer a bonus to the insured person which is accrued over the policy term and paid along with the last instalment.
In case of death of the life insured during the defined policy term, the entire sum assured along with accrued bonuses is paid to the nominees of the life insured. The survival benefit payouts already paid to the life insured are not deducted from this amount.
Basically, money back plans give small amounts to the life insured at regular intervals instead of paying the entire amount as a lump sum amount at the end of the term. It is a variant of the endowment plan with the benefit of liquidity.
Unit Linked Insurance Plans (ULIPs) are also good money back plans with all the above qualities. In a ULIP you get market linked returns along with life cover, maturity benefit, loyalty additions and the best of all you are free to make partial withdrawals as per your needs, no need to wait for the next payout. Plus, it enjoys all the tax benefits applicable to a life insurance plan.
Here's a 3 round takedown:
1. Round 1 - Life Cover
Term Life Insurance Plans provides you with a very high amount of Life Cover when compared to the Life Cover provided by a Money Back Life Insurance Plans by paying the same amount. For example, a healthy individual can get a life cover of Rs. 1 Crore for a nominal amount of only Rs. 700 per month under a Term Life Insurance Plan as against a life cover of just Rs. 20 Lakhs under a Money Back Life Insurance Plan by paying the same amount.
So, on death, a person’s nominee would receive Rs. 1 crore under a term life insurance plan. If he has opted for a money back life insurance plan, only Rs. 20 lakh along with all the accrued bonuses till date becomes payable.
Verdict: Round 1 goes to Term Life Insurance Plan since term life insurance plans do not have any investment component in them, they can easily provide very high life cover at the cheapest possible rates.
2. Round 2 - Return on Investment
Term Life Insurance Plans do not pay anything back to the life insured in case he survives the defined policy term. In short, if the insured person survives he forgoes the premiums paid by him under a pure term life insurance plan.
On the other hand, if a person survives the defined term under a money back life insurance plan, he receives a particular percentage of his chosen sum assured as Money Back payouts. The life insured is also eligible to receive bonuses as declared from time to time. These bonuses are accrued over the entire tenure of the policy and paid out along with the last instalment under the money back plan. In case of death of the life insured, the bonuses are paid to the nominee along with the life cover amount.
Verdict: Round 2 goes to Money Back Life Insurance plans as they provide survival benefits to the insured person. These survival benefits help in meeting the short-term goals of the insured person like paying for the children’s education or that vacation you wanted to take with your entire family and so on. These short-term financial needs can arise from time to time and money back plans can effectively help in meeting the same.
3. Round 3 - Tax Savings
Here, both the contenders, term life insurance and money back life insurance are on an equal footing. Both of them provide the same benefit to the life insured under Section 80 C and 10 (10 D) of Income Tax Act, 1961.
All the premiums paid under term life insurance and money back life insurance plans are eligible for a tax exemption up to Rs. 1.5 Lakhs under Section 80 C.
The proceeds from term life insurance and money back life insurance plans in the form of a death benefit, survival benefit and maturity benefit are completely tax-free under Section 10 (10 D).
If the life insured enhances his protection level by attaching health-related riders like Critical Illness, Surgical Care, Hospital Care, etc. to his term life insurance plan or money back life insurance plan, an additional exemption up to Rs. 25,000 is provided under Section 80 D of the Income Tax Act, 1961.
Verdict: Round 3 goes to both the contender's i.e. term life insurance and money back life insurance, they both receive one point each as they both are life insurance products and provide the same tax benefits under various sections of the Income Tax Act, 1961.
So, the point tally for both term life insurance and money back life insurance stands as under:
|Category||Term Life Insurance||Money Back Life Insurance|
|Return on Investment||0||1|
What will you choose, now?
People say that investment and insurance should be kept separate. We too recommend that, one should first secure his family with a term life insurance, and then compare various investment options available which include money-back plans, ULIPs and Mutual Funds.
Term Life Insurance is the best choice for people who are looking for a higher protection at nominal premiums.
While the other contender, money back life insurance is the best choice for people who have completed their protection requirements and now have enough money left to save and invest for meeting their short-term life goals through regular survival benefit pay-outs.
As you are different from the person standing next to you, your needs would also differ. Hence, it is important to choose what is best for you and the betterment of your loved ones in your absence based on your needs.