Why Money Back Plans May Not Work For You

Despite their popularity, money back plans have some significant drawbacks that most people seem to be unaware. Here are some of them:

Limited life insurance cover While money-back plans combine life insurance with investment, for the same premium amount, the life insurance coverage is not as high term plans. It is worthwhile pointing out that term life insurance term plans or term plans only provide life insurance coverage. Here is an illustration.

For a 30-year-old and non-smoker a Rs 10,000 annual premium will typically provider a life insurance cover of Rs 1.5-2 lakh in a money-back plan with a 20 year term. For the same premium amount, a term plan will typically provide life insurance coverage of Rs 60-90 lakh for a 25 years term.   

Limited growth of investments Money-back plans typically invest in debt investments as mandated by the investment guidelines of insurance industry regulatory body Insurance Regulatory and Development Authority (IRDA). While the investment risks are borne by the life insurance company, this limits the returns on your money.

In the recent years, money-back plans have typically announced a bonus of Rs 39-44 per Rs 1,000 of sum assured. Given the average annual inflation rate of 5.69 per cent  since January 2014 till September 2016, when inflation been declining, this is clearly an investment which will be hurt by inflation in the long-term.

Reduced maturity amount Since money-back plans make periodic payouts out of the sum assured, the amount saved at the end of tenure is less than even an endowment plan

Clearly, you need to take a very hard look before you consider buying a money-back plan for any long-term need like children’s higher education. Money-back plans are often sold with the argument that you don’t end up taking risks since your money in not getting invested in equity markets like most unit linked insurance plans (Ulips). But there is a major risk of inflation denting the growth of your money.

You are probably better off having a combination of term plan and pure investments that beat inflation like equity funds. Or, you could consider unit linked insurance plans (Ulips) that can provide you with adequate life insurance and access to typically high growth through equity investments in the long-term i.e. 8-10 years or more.