Money Back

7/28/2019 Money Back

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LIC Unlike ordinary endowment insurance plans where the survival benefits are payable only at the end

of the endowment period, this scheme provides for periodic payments of partial survival benefits as

follows during the term of the policy, of course so long as the policy holder is alive.

In the case of a 20-year Money-Back Policy (Table 75), 20% of the sum assured becomes payable each

after 5, 10, 15 years, and the balance of 40% plus the accrued bonus become payable at the 20th year.

For a Money-Back Policy of 25 years (Table 93), 15% of the sum assured becomes payable each after 5,

10, 15 and 20 years, and the balance 40% plus the accrued bonus become payable at the 25th year.

An important feature of this type of policies is that in the event of death at any time within the policy

term, the death claim comprises full sum assured without deducting any of the survival benefit

amounts, which have already been paid. Similarly, the bonus is also calculated on the full sum assured.

Receive payouts once every 5 years

This life insurance plan gives you a lump sum payout once every 5 years and enables you to take care of your planned as well as unexpected financial situations.

Earn bonuses with this money back plan

Bonus is declared by the company at the end of each financial year and is added to your account, hence

ensuring that the premiums deposited by you earn satisfactory returns.

Guaranteed addition upon maturity

Regardless of your policy term, earn guaranteed additions at the end of 15th, 20th and 25th year

provided policy is in force. It is this feature that makes the Kotak Money Back Plan one of the best

money back schemes in India.

Plan Period Guaranteed Addition

15 years 20% of sum assured at the end of 15 years





Life insurance benefits that keep increasing

With the rising standard of living and inflation rates, it is important that your life cover also increases

accordingly to provide your family with adequate financial protection should anything untoward happen

to you.

Is Your Endowment Policy A Waste of Your Money?

Up to a few months ago, ULIPs were being pushed in a big way. An insurance product that helped you

also invest in the equity markets, in a single contract, was being touted as a dream product come true.

Research was done and efforts to educate the investor have since rubbished these claims of godliness.

Stories of this high commission product that had not yet even proved itself, with unscrupulous agents

hard-selling them to unaware customers who didn’t even need these policies, made news time and time

again.

Regulators stepped in, and ULIPs are now recovering from the bad press, quietly. Advisors are reluctant

to really sell ULIPs, for fear that the client now knows that he will be getting a bad deal, and will not

trust the advisor anymore. And lack of trust is one of the worst things that can happen to an advisor

from his client.

So advisors are now selling traditional plans. Once again they are insisting that traditional plans are

excellent, there is no market risk, the maturity value is assured, and everybody must have these policies.

But have insurance agents truly started working on your behalf instead of their own? Is a traditional plan

really the best thing for you?

Let’s have a look.

What is a traditional plan?

Term plans, endowment policies, money back policies, pension plans – these are called traditional plans.



A term plan gives you life cover, with no maturity or interim benefits. Premiums are the lowest for this

type of policy, and for this low premium, your family will get the highest benefit. A Rs. 10 lakh term plan

for a 35 year old with a 20 year policy tenure will cost around Rs. 5,000 per year. Only very few advisors

are actively selling this type of plan.

As customer wants evolve, so do industry offerings.

Customers weren’t always satisfied with the idea of no maturity benefit upon surviving the term of the

policy, and so endowment plans were born.

An endowment plan offers you life cover, charges you higher premiums than a term plan, and gives you

a maturity benefit. So if you survive the term, you will receive some amount of money as a maturity

benefit, unlike in the case of a term plan. It also offers you bonuses along the way, paid out as an

accumulated lump sum on maturity if you survive the term. over a 20 year tenure, your endowment

plan, if you include bonuses, could yield you up to 8% per annum.

By itself, this return seems average, not poor. But, keep in mind this is over a horizon of 20 years.

In 20 years, considering inflation, your premiums will not be providing you much return at all. And a

good diversified equity mutual fund will yield you double of this per year, beating inflation and giving

you a return on your investment.

All said and done, an endowment plan yielding even as much as 8% per annum over a 20 year horizon

(and not all endowments yield this, some yield 5% and 6%) is a waste of your money.

A money back policy is nothing but an endowment plan that’s been dressed up a bit.

While an endowment plan will give you a maturity benefit on surviving the entire term, a money back

policy pays out for every few years of survival. If for example you take a 20 year money back policy, you

will get some proportion (say 25%) of your Sum Assured every few years, say every 5 years. You will also

get your remaining Sum Assured plus accumulated bonuses, on surviving the entire term.

Yield on a money back policy sometimes comes to a little more than yield on an endowment policy,

considering that once you get the interim pay outs, you can invest them on the spot.

But overall, endowment policies and money back policies are poor performers, especially considering

the fact that the tenure is so very long (20 years, 25 years, 30 years).



So what do you do if you’ve already got one of these traditional policies? Should you drop it?

Often we come across clients who have a number of such policies, having been sold multiple identical

policies with different tenures by their agents. They want to know if they should drop their insurance

policies.

This depends entirely on 3 things:

a. What is the remaining policy tenure i.e. how many premiums are yet to be paid?

b. If the policy is surrendered today, what will be the surrender value?

c. What is the expected rate of return on the alternate investment option? i.e. if you are not

paying premiums, where will you be investing the saved premium amount?

Consider the case of Mr. Shah again, who has an endowment policies with a 20 years tenure. Would it

make sense to drop any one of these policies and invest the surrender value and remaining premiums

into mutual funds?

See the table below:

YearsEndowment

Premium

Surrender

Value of

Endowment

Term

Premium

Premium

saved &

invested in

Mutual Funds

Return from

Mutual

Funds @ 12%

Benefit /

Disadvantage *

0 24,632 - 2,059 22,573 1,821,613 751,613

1 24,632 - 2,059 22,573 1,603,867 533,867

2 24,632 24,893 2,059 22,573 1,600,877 530,877

3 24,632 51,354 2,059 22,573 1,588,464 518,464



4 24,632 69,138 2,059 22,573 1,504,721 434,721

5 24,632 89,341 2,059 22,573 1,431,511 361,511

6 24,632 112,249 2,059 22,573 1,367,515 297,515

7 24,632 138,147 2,059 22,573 1,311,429 241,429

8 24,632 167,422 2,059 22,573 1,262,400 192,400

9 24,632 200,422 2,059 22,573 1,219,362 149,362

10 24,632 237,516 2,059 22,573 1,181,352 111,352

11 24,632 274,896 2,059 22,573 1,135,863 65,863

12 24,632 316,940 2,059 22,573 1,095,690 25,690

13 24,632 364,504 2,059 22,573 1,060,870 (9,130)

14 24,632 418,623 2,059 22,573 1,031,454 (38,546)

15 24,632 480,461 2,059 22,573 1,007,348 (62,652)

16 24,632 555,533 2,059 22,573 994,972 (75,028)

17 24,632 640,292 2,059 22,573 984,875 (85,125)

18 24,632 735,995 2,059 22,573 976,829 (93,171)

19 24,632 844,008 2,059 22,573 970,571 (99,429)

20 Maturity Value

incl. Bonus

(Rs.)

1,070,000

* (Return from MF minus Endowment policy Maturity Value)



The premium paid for the endowment policy is Rs. 24,632 per year. The premium paid for an equal sum

assured (Rs. 5 lakhs) term plan is Rs. 2,059. The difference is Rs. 22,573 of additional premium every

year.

The table above examines whether it makes sense for Mr. Shah to drop the policy and invest the

surrender value received and the remaining premiums (that he would have paid) into mutual funds,

assuming a return of 12% per year from the mutual fund.

Consider Year 7, the year of his 8th premium (as the count starts at Year 0).

If he surrenders the policy in this year, he will receive Rs. 138,147 as the surrender value. He can invest

this surrender value and also invest the remaining premium amounts (Rs. 22,573 per year for the

remaining years) into mutual funds, and the money he invests would grow to Rs. 13,11,429 by the endof the 20 year period. This is a surplus of Rs. 2,41,429 over Rs. 1,070,000 what the endowment policy

would have paid him.

Now consider Year 17 i.e. the year of his 18th premium.

If he surrenders today, he will receive a surrender value of Rs. 6,40,292. He can invest this corpus and

the remaining premiums into mutual funds, and the corpus accumulated within the next 3 years would

be Rs. 9,84,875. This is less than he would receive is he simply continued with the endowment policy.

The benefit of continuing the policy is Rs. 85,125.

In this particular case, the break-even year was Year 12. If he surrendered anytime up to and including

Year 12, it would make financial sense for him to drop the policy and invest the surrender value and

remaining premiums into mutual funds.

Anytime after Year 12, it would be more financially prudent to keep the policy.

Your Action Plan

Now you know exactly what a traditional policy is all about. If you have these policies, then depending

on how long you have had it, what the surrender value would be, and what rate of return you would get

on your alternate investment, you can decide whether you would like to keep the policy or not.

Else, you can always speak to your financial planner, who will create a customized insurance plan for

you. And remember – with a straightforward term plan, you don’t have to worry about whether your

money is being effectively utilized. A term plan really is the best life insurance a person could have.

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