What are the pros and cons of taking a money-back insurance policy? Which is better—a Ulip or a combination of life insurance and mutual funds?
The benefit of taking a money-back plan is that during the term of the policy, the insured receives tax-free, fixed proportions of the sum assured at regular intervals. On maturity, the insured receives the balance portion of the sum assured plus the bonus/participating profit/ guaranteed addition for the term of the policy, which is also tax-free in most cases. This plan is suitable for people who require lump sum amounts in future to meet specific expenses such as children’s education or marriage. The policy provides insurance protection for the family as well as provision for old age.
However, money-back policies need commitment to pay for a long duration, like 15 to 25 years, and the premium is higher compared to endowment and term plans. If one gets money-back plans with guaranteed addition, the premium is even higher.
There are many ways of investing your money and the choice depends on the investor’s knowledge of the available products in the market and his risk appetite. If one chooses to impose self-discipline and invest regularly, other saving/investment avenues, such as mutual funds, offer higher returns than a Ulip. In order to decide which option to choose, in your insurance proposal, remove the portion of the premium allotted for issuance of life insurance to you, that is, the mortality charges and other administration charges in your Ulip (you also take into account the premium of a pure term policy). Now, taking the remaining part of the payable premium, compare the promised yield in the insurance plan (Ulip) to any pure investment instrument. If the investment instrument yields better returns, your answer is clear—get the term insurance and invest the balance of the proposed premium into the investment product.
