Ch. 1: What is Money Back Policy?

There are several kinds of life insurance plans in the market, but one of the most popular of the lot has to be Money-Back Plans. Why are they so popular?

A money-back plan, in the most simplest sense, is an insurance plan that gives ‘money back’ to you in the form of regular guaranteed² payouts. They are assured and do not depend on any market conditions, hence the growing popularity of this plan.

These plans are offered by life insurance companies and hence are a blend of investment and insurance. The investment part will make frequent payouts as per the policy schedule as long as you survive the policy term. This ensures a steady source of income to help you meet expenses at different stages. The insurance part of course provides financial security to your dependents, allowing them to live a comfortable life even in your absence.

You are responsible to pay the requisite premiums for a certain period of time to keep the policy active. In turn, the insurance company assures you several benefits as returns for the money you are investing.

These plans are ideal for people who want a fixed return on their investments. It helps you in maintaining long-term savings and earn regular income to cover financial goals in your life like your child’s higher education fees, or as a comfortable income after you retire.

So, Money-Back plans give you returns in the form of periodic payouts as well as an insurance cover. While this is the most basic explanation, there are as you may have guessed it many nuances to these plans. Let’s understand them one step at a time with the help of scenarios.

Survival Benefit
The most important feature of a money-back plan is the periodic payouts it gives you, called the Survival Benefit. The time span during which this benefit is paid out is called the benefit payout period.

These payouts are calculated in two ways, either as -

• A percentage of the sum assured in cases of policies where you choose the sum assured. These are known as Sum Assured Front Money-Back Policies.
• A percentage of the annual premium you pay in cases of policies where you choose the premium. This may be dependent on various factors like your age, premium payment term, benefit payout period, and the premium you are paying. These are known as Premium Front Money-Back Policies.

For example -

Kiran and Harsh intend to buy money-back policies.

Kiran - A business owner, wants regular payouts after she retires and ample cover for her dependents, which is why she is comfortable with choosing the sum assured no matter what the premiums come up to. She chooses a policy with a sum assured of Rs 40 lakhs for which the annual premium is Rs 1 lakhs. The policy term is 30 years and the premium payment term is 20 years. Since she has chosen the sum assured, the survival benefit will be a percentage of it. Let’s assume it is 10% of the sum assured which is payable from the 21st policy year to the 30th policy year.

So,

So, the survival benefit = 10% of 40 lakhs = Rs 4 lakhs - payable to Kiran annually from 21st policy year to 30th policy year.

Harsh - A salaried individual who earns around Rs 65,000 a month. Since he has other expenses to take care of, he wishes to choose a premium which can comfortably fit in his budget. Hence, his cover amount will be calculated on the basis of the premium he chooses. Let’s say he can pay Rs 50,000 annually. The policy term is 30 years and the premium payment term is 20 years. The sum assured is Rs 5 lakhs. Since he has chosen the premium amount, the survival benefit will be a percentage of it. Let us assume it is 10% of the annual premium which is payable from the 21st policy year to the 30th policy year.

So,

So, the survival benefit = 10% of 50,000 = Rs 5000 - payable to Harsh annually from 21st policy year to 30th policy year.

The survival benefit, depending on the product, may be -

• Fixed over the entire benefit payout period
• Increasing, say, 5% per annum

For instance, Arjun and Nimrat decide to buy money-back policies with a cover amount of Rs 20 lakhs. They will have to pay a premium of Rs 40,000 for a period of 15 years. The policy term is 30 years. The annual survival benefit payouts start in the 16th policy year and continue up to the 25th year, and are equal to 10% of the cover amount. The only difference is that Arjun’s payouts are fixed over the entire benefit payout period, whereas Nimrat’s increase by 5% each year.

So,

Arjun
Annual Survival Benefit Payout = 10% of 20 lakhs = Rs 2 lakhs. He will be paid Rs 2 lakhs on an annual basis from the 16th policy year to the 25th policy year.

Nimrat Survival Benefit Payout for the 16th year = 10% of 20 lakhs = Rs 2 lakhs

Her payout for the 17th year = 2 lakhs + 5% of 2 lakhs
= 2 lakhs + 10,000
= Rs 2,10,000

Her payout for the 18th year = 2,10,000 + 10,000
= Rs 2,20,000
And so on…

The survival benefit is paid if you, the policyholder, survive during the policy term and is paid as per the policy schedule. The policy schedule is a part of the policy document and lays out the structure, frequency, and timeline of the benefits. It may provide the survival benefit to be paid a few years after the policy inception, or after the premium payment term ends, or after the policy term ends - depending on the product you buy. It may be payable on a monthly, quarterly, half-yearly, yearly basis.

You can also choose to receive this as a lump sum amount - this differs from product to product. Some plans may also return a lump sum of all the premiums you have paid after the benefit payout period.

Let’s have a look at a few scenarios to understand this better.

Reema purchases a money-back policy with a cover amount of Rs 20 Lakhs in 2022. The premium payment term is 10 years and the policy term is 22 years. The policy document says that she will receive 10% of the cover amount as the survival benefit every year over a period of 10 years.

So -

Scenario 1 - The policy schedule says the survival benefit payout period will begin 4 years after the policy inception.
In this case, Reema will start receiving the survival benefit in 2026 and this will continue over the succeeding 10 years, i.e., till 2035.
Survival benefit each year from 2026 to 2035 = 10% of Sum Assured
= 10% of 20,00,000
= Rs 2,00,000.

Scenario 2 - The policy schedule says the survival benefit payout period will begin 2 years after the premium payment term is over.
This 2-year gap is known as the deferred period. In this case, Reema will start receiving the survival benefit in 2033 and this will continue over the succeeding 10 years, i.e., till 2042.

Survival benefit each year from 2033 to 2042 = 10% of Sum Assured
= 10% of 20,00,000
= Rs 2,00,000.

Scenario 3 - The policy schedule says the survival benefit payout period will begin right after the policy term is over.
In this case, Reema will start receiving the survival benefit in 2043 and this will continue over the succeeding 10 years, i.e., till 2052.

Survival benefit each year from 2043 to 2052 = 10% of Sum Assured
= 10% of 20,00,000
= Rs 2,00,000.
She may also be given the option to receive this amount as a lump sum.

You are eligible to receive the maturity benefit once the policy matures, i.e., when the policy term ends.

The maturity benefit, depending on the product you choose, may be -

• The sum assured and the bonuses accrued. Bonuses will be paid only if you have chosen a Participating plan.
• The survival benefit as periodic payouts.
• Commutation Option - You can also choose to convert the survival payouts in a lump sum and receive it in one go.
• The bonuses accrued, if any.

For example - Ahmad buys a participating money-back policy in 2022 with a sum assured of Rs 35 lakhs. The policy term is 30 years. He is required to pay a premium of Rs 50,000 every year for a period of 20 years. The survival benefit is 20% of the cover amount.

Scenario 1 - The maturity amount is the sum assured along with accrued bonuses.
Let’s assume that the bonus accrued at the end of the policy term is Rs 60,000.
Therefore, Maturity Amount = Sum Assured + Accrued Bonus
= 35,00,000 + 60,000
= 35,60,000
Ahmad is eligible to receive a total maturity amount of Rs 35,60,000 when the policy term ends, i.e., in 2051.

Scenario 2 - The maturity amount is equal to just the bonuses.
His policy accrues Rs 60,000 as bonuses over the policy term. Hence, he will receive RS 60,000 as the maturity amount.

Scenario 3 - The maturity amount is paid in the form of survival benefit payouts.
Let’s assume that the survival benefit payouts will be paid over a span of 5 years.

As mentioned above, Survival Benefit = 20% of Sum Assured
= 20% of 35,00,000
= 7,00,000

So, Ahmad will receive annual payouts of Rs 7 lakhs from 2051 to 2055. He may also be given the option to receive this as a lump sum.

If you pass away during the tenure of the policy, the death benefit amount is paid to your nominee. The death benefit amount is the total sum assured of the policy and all the bonuses, if accrued.
The death benefit is exclusive of any paid survival benefits. So -

If you pass away before the survival benefit is paid
Your nominee will receive the sum assured along with any accrued bonuses and the policy will terminate.

If you have received survival benefit payouts before you pass away
Those survival benefits shall remain intact, and your nominee will receive the sum assured with any accrued bonuses and the policy will terminate.

For example - Rahul purchases a participating money back policy in 2020 with a cover amount of Rs 30 lakhs, with a policy term of 25 years. The annual premium is Rs 40,000 and this is payable till 2030. The survival benefit is payable after the premium payment term on an annual basis. It equals to 15% of the cover amount.

Scenario 1 - Rahul passes away in 2028
No survival benefits are paid to Rahul since he passes away before they accrue under the policy. His nominee is paid the death benefit of Rs 30 lakhs with any accrued bonuses. The policy terminates once the death benefit is paid.

Scenario 2 - Rahul passes away in 2033
In this case, Rahul will have been paid the survival benefit in 2031 and 2032, on an annual basis. No further survival benefits will be paid because he passes away in 2033.

Survival benefit = 15% of cover amount
= 15% of 30 lakhs
= 4.5 lakhs
Hence, he will have received Rs 4.5 lakhs as the survival benefit in both 2031 and 2032.

If he passes away in 2033, his nominee will be paid a death benefit of Rs 30 lakhs and any accrued bonuses. This death benefit will be completely unaffected by the already paid survival benefits. The policy will terminate once the death benefit is paid.

However, some products may allow any remaining survival benefits to be paid out to your nominee, even after you pass away. This generally happens in cases where the survival benefit payouts start after the policy term is over.

Depending on the product, the nominee can choose the death benefit to be paid out as -

• A lump sum.
• Staggered payments. The percentage, tenure, and frequency depends on the product. For instance, 12% of the sum assured can be paid annually over a span of 10 years.

Let’s take a look at Rahul’s example again. His nominee can choose the death benefit (sum assured) to be paid in a lump sum in 2033. Alternatively, they can choose to receive the death benefit in a staggered manner. Let’s assume that they will be paid 20% of the death benefit annually over a span of 5 years.

So,

Annual death benefit payout = 20% of 30,00,000
= 6,00,000

Hence, they will receive Rs 6 lakhs on an annual basis from 2033 to 2037.

Please note that this choice may not be available with each product.

Suppose, Ms. Chatterjee buys a Participating sum assured front money-back policy in 2015 with a 25-year policy term and chooses a sum assured of Rs 35 Lakhs. The annual premium comes out as Rs 40,000 - to be paid across a premium payment term of 10 years. Her son is the appointed nominee.

The policy starts paying her survival benefits after the premium payment term is over. The deferred period is two years, and hence, the benefit payout period starts from the 12th policy year. She will be paid 10% of the sum assured every year over a span of 10 years. So, the benefit payout period will continue till the 21st policy year.

Let’s see how the benefits work

1. Survival benefit
Since the premium payment term is 10 years and there is a 2-year deferred period, she will be paid the survival benefit in the 12th year right up to the 21st year on an annual basis.

Survival Benefit paid per year = 10% of Sum Assured
= 10% of 35 Lakhs
= 3.5 lakhs

So, she is entitled to receive Rs 3.5 lakhs as the survival benefit on an annual basis during the benefit payout term, i.e., for 10 years.

2. Maturity Benefit
The maturity benefit she will receive once the policy term is over is the sum assured along with any bonuses. So, she is entitled to receive Rs 35 Lakhs as the maturity benefit in 2040 along with the accrued bonuses.

3. Death Benefit
If Ms. Chatterjee passes away in the 19th policy year, her son is eligible to receive the death benefit immediately. This is the sum assured along with accrued bonuses. The death benefit will not be affected by the survival benefits already paid to her.

Therefore, her son is eligible to receive a death benefit of Rs 35 Lakhs along with the accrued bonuses, in 2034. The policy will terminate after this.

We hope this article helped you understand what a money-back plan is and the benefits it gives out. It is a good choice for you if you want a secondary source of guaranteed² income which will help you cover expenses like EMI payments, school fees, medical bills - without causing a dent to your current financial scenario.