You will get money on the 5th Year, 10th Year, 15th Year etc! This is the usual sales pitch of an Insurance Agent when he is selling Money Back Policy. But what is the reality? Is Money Back Policy a better Investment option?
Certainly not. Money Back Policies are the worst investment. This is because of the very Premium of Money Back Policies.
If you are aged 30, you can buy an Endowment Policy of LIC for 20 years for Rs. 5 Lakhs, by paying an annual premium of Rs. 23,809. But, if you are buying a 20-year Money Back Policy of LIC, your annual premium will be Rs. 37,259. The increase in Premium for Money Back Policy is around 56%!
What are the benefits under the Money Back Policy?
As the name indicates, you will get periodical amount in a Money Back Policy. These are called Survival benefits. In the 20-year Money Back Policy of LIC, you will get 20% of the sum assured at the end of 5th Year, 10th Year and 15th Year. At the end of 20th Year, you will get 40% of the Sum Assured and Bonus.
In the above example, you will get Rs. 1 Lakh as Survival benefit at the end of 5th Year, another Rs. 1 Lakh at the end of 10th Year and another Rs. 1 Lakh at the end of 15th Year. At the end of 20th Year, you will get Rs. 2 Lakhs and Bonus for the 20 years. As per the current Bonus rate of LIC, you can expect around Rs. 3.9 Lakhs as Bonus.
What happens in case of death during these 20 years?
In case of death anytime during these 20 years, Nominee will get the full Sum assured of Rs. 5 Lakhs and the Bonus till date. For example, if there is death in the 12th Year, the Nominee will get the Sum Insured and Bonus for 12 years. The amount already paid as Survival benefits will not reduce the death claim amount. This is the attraction in Money Back Policies.
You can reinvest the Survival benefits and earn higher returns
This sales pitch is the most attractive, while selling Money Back Policies. But the reality is different. When you are getting the Survival benefit of Rs. 1 Lakh after 5 years, there will be some other priority for you and in all likelihood the amount will be spent on such priorities. Reinvestment seldom happens.
Is Money Back Policy a good investment for you?
No, such policies neither offer decent returns nor sufficient risk cover for the policy holders. There is no flexibility in such policies. Once you join the Policy, you have to pay the premium for the full term whether you like it or not. If you want to close the Policy, you will get only the Surrender value. In most cases, you will lose the amount.
Money Back Policies – the worst investment option
In the above example, you have seen that you have to pay a premium of Rs. 7,45,180 in 20 years for a Rs. 5 Lakh policy!
Life Insurance policies are not good for investment. Money Back Policies are the worst investment options in the market. Bonus rates are coming down year after year and this will make policies unattractive. The Bonus rates of most of the private companies are low compared to the current LIC rates.
It is better to avoid money back policy for investments because of poor returns and low flexibility.