Cashing in on insurance

Before the Stock market boom and until unit linked insurance policies (ULIPs) came on the scene, money-back policies were preferred by buyers who planned for the various milestones in their lives. Money-back paid out a regular and periodical survival benefit during the policy term.

For most buyers, it covered the basic need of a regular income—quite handy if you have goals such as buying a house or for your children’s requirements. But now, the money-back plans seem to be losing out to ULIPs.

 Should a money-back policy find a place in your insurance needs? Money-back allows you partial withdrawals at pre-specified times during the term policy.

The difference between a moneyback policy and an endowment policy is that the latter allows you to take a cumulative sum after maturity upon survival, while a money-back plan allows regular withdrawals of a pre-determined sum.

But there’s an inherent advantage: in case of the worst, there is no reduction in the sum assured even if there were survival benefits paid earlier.

Money-back policies come with different payout plans. But generally, in most money-back plans, payouts are done every five years and are calculated as a percentage of the sum assured.

The challenge from ULIPs How ULIPs compare with traditional money-back policies. ULIPs  Investment plans take precedence over life insurance Greater returns on investment over the long term Not good for the short term or under 10 years Allows withdrawal after 3 years, but one has to pay mortality charges Money-Back Policy Insurance takes precedence over investments Returns are not too high like market driven ULIPs. There are no fund management charges  For the short term (like 5 years), a traditional money-back is better Withdrawal plans are rigid, and could lead to a lapse in the policy if you don't pay premium

So, a typical money-back policy with a 20-year term will make payouts at the end of the fifth, 10th and 15th year respectively. Payouts are generally about 20 per cent of the sum assured, but they vary between plans.

The key aspect of the moneyback policy is the steady rate of return and preservation of capital. Says R. Ramakrishnan, former Executive Director (Actuarial), LIC: “The prime focus of LIC is insurance and capital protection.

Therefore, investments are made prudently, in line with government norms, involving almost zero-risk. Hence, in a traditional money-back product, where the insurer bears the risk, returns range anywhere between 7 and 10 per cent.”

Some other money-back plans offer double or triple life cover or an increasing cover option that corresponds with the increase in term of the plan. If you are keen on a money-back plan, you could explore the premiums for a simple money-back (no frills) and take a term assurance rider at the outset with this, for an increased cover— instead of going for the double and triple cover options.

But with the focus on returns these days, money-backs seem to be losing to ULIPs. The returns from money-back policies are lower than those of ULIPs in a booming market.

In general, money-back policies have returned between 5 and 7 per cent after considering the periodic payouts also known as survival benefits.

As the money-back policy invests in safer government debt, the yields are lower and, after deducting the insurance cost, the final return to the investor gets reduced.

But it is worth doing the homework on comparative returns of different money-back policies of insurers with the help of your financial planner.

Some money-back policies come with a few frills that make them a little attractive.

For instance, the Kotak Life Insurance Money-Back policy says that if the policyholder is not able to pay premium in any one year, the policy will not lapse automatically if the accumulation has enough to take care of the mortality charges.

The Pros and Cons

Premiums on a money-back policy are higher than, say, a pure term plan. Rough back-of-the-envelope calculations show that premiums are higher by about 25 times than those of a term plan.

The basics of money back What a money-back policy covers and what could be your returns. THE CONCEPT: This policy provides adequate cover for life, critical illness or disability. It also inculcates a regular savings habit THE PLAN: Entails a lump sum payment on survival up to maturity date. A part of the basic sum assured is given as cash back at regular five year intervals. The sum assured increases progressively with time in most plans. In the case of death, you get the sum assured irrespective of survival benefits paid earlier THE PREMIUM: It is high as compared to a pure term policy or even an endowment policy THE RETURNS: On survival, the returns are low. For example, on a premium of Rs 34,124 for a 30-year-old, the maturity benefits after 20 years amount to Rs 8,72,600

That is because a part of the premium goes into investments such as securities of the government of India. On the other hand, the sum assured in a ULIP is generally five times the premium paid, with minor differences.

For an annual premium of Rs 10,000, you get a cover of around Rs 50,000. However, the premium depends on age with some ULIPs offering a greater life cover.

Investment returns from ULIPs range anywhere between 15 and 25 per cent over the long-term (which is a minimum of 10 years) depending on the market conditions and the underlying portfolio that you choose. Generally, a 15 per cent return can be considered the norm—the Sensex returned a compounded return of 18 per cent in the last 17 years. However, remember that ULIPs come with market risk—stocks are riskier assets.

On the other hand, a moneyback policy invests largely in debt securities of governments and highrated securities. Hence, over the tenure, the inherent portfolio structure is generally safe.

In a ULIP, again, one can withdraw funds whenever a need arises, provided your accumulations are more than the mortality charges or insurance charges, a money-back policy allows withdrawals only after five years.

A ULIP investment requires you to constantly monitor the funds so you can make timely switches according to market conditions. Investors can switch from a conservative to an aggressive portfolio, and vice versa.

If you are a conservative investor, and need insurance cover, the money-back policy could be a good alternative as bonuses are an added advantage. LIC is known to pay decent bonuses and at the same time has safety of the investment in mind. However, money-back policies are rigid— surrendering is an expensive affair, and the returns are fixed.

If you are looking for a short-term investment (around five years), a money-back is better. But if you are looking for the long-haul investment, a ULIP tends to score as the risk of equity investments diminishes over time. Hence, determine your risk appetite and your investment horizon before choosing a money-back plan.