Term Plan vs Money Back Policy: Which You Should Buy?

2025-02-02

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Choosing the right life insurance policy is an essential decision that can significantly impact the financial security of your family in case of any unfortunate event. When it comes to investing in life insurance, there are two popular options: Term Plans and Money-back Policies. These policies have distinct features, benefits, and suitability that help in meeting specific financial goals and circumstances.

In this blog, you will delve into the details of both types of policies and discuss term insurance vs. money-back policy, comparing their key features. You will also explore the advantages that can help you decide which policy is better suited to meet your needs.

Also Read: Difference between Endowment Plans and Money Back Policies

Key Takeaways

Term Plans offer high coverage at low premiums and are best suited for those seeking pure life protection without an investment component.
Money-back policies combine insurance with savings, offering periodic payouts and a maturity benefit, making them helpful in achieving life goals such as education or home buying.
Term insurance is more cost-effective, especially for young earners or those with limited budgets, as it focuses purely on financial protection.
Money-back policies provide liquidity during the policy term through survival benefits, which can help with planned financial milestones.
Tax benefits are available under Section 80C for both plans; however, money-back policies may offer additional tax advantages on returns and at maturity.
The best policy depends on individual financial goals, income stability, and risk appetite.

Understanding a Term Plan

A term plan is an entirely pure life insurance policy that offers coverage for a particular term. It does not include any investment component, meaning there is no cash value or maturity benefit associated with it. This means that there is no payout or lump sum amount given to the insured if he survives the policy term.

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Benefits of Buying a Term Plan

Here are some prominent benefits of buying a term plan.

High Coverage at Affordable Premiums: Term insurance offers a large sum assured (life cover) at relatively low premium rates. This makes it one of the most cost-effective ways to secure your family’s financial future. For example, a young individual in their 20s or 30s can obtain high coverage (₹50 lakh to ₹1 crore or more) by paying a nominal monthly premium. It’s an ideal solution for those who want maximum protection without stretching their budget.
Simplicity and Transparency: One of the key advantages of term insurance is its straightforward nature. There’s no investment or savings component - just pure protection. This simplicity makes it easier to understand and compare policies. You know precisely what you're paying for: a guaranteed payout to your nominee in case of your unfortunate demise during the policy term.
Pure Insurance Benefits:The primary purpose of a term plan is to provide life cover, nothing else. It’s not tied to the market or returns. This focus on protection ensures your family receives the promised sum assured, which can be used to manage day-to-day expenses, pay off loans, or fund your child’s education in your absence.
Flexibility: Most modern term plans come with the option to add riders - extra features that enhance your coverage. Common riders include:
- Critical Illness Rider: Provides a lump sum if you’re diagnosed with a serious illness like cancer, heart disease, etc.
- Accidental Death Benefit Rider: Offers an additional payout if death occurs due to an accident.
- Waiver of Premium Rider: Future premiums are waived if the policyholder becomes disabled or critically ill.

Understanding Money-back Policy

A money-back policy is a type of life insurance policy that offers both insurance coverage and periodic returns during the policy term.

Under a money-back policy, the policyholder receives survival benefits, a fixed percentage of the sum assured, at regular intervals during the policy tenure. These payouts can be used to meet recurring financial needs such as children’s education, loan EMIs, or even annual vacations.

At the end of the policy term, if the policyholder survives, they receive a maturity benefit, typically the remaining sum assured along with any accrued bonuses. In the unfortunate event of the policyholder’s death during the term, the full sum assured is paid out to the nominee, regardless of any survival benefits that have already been paid. This ensures the family’s financial protection remains intact.

Benefits of Buying a Money-back Policy

Periodic Payouts: One of the key attractions of a money-back policy is that it provides regular payouts (survival benefits) at specific intervals during the policy term. These payouts can be used for various financial needs or goals, creating a sense of financial security.
Maturity Benefit: Unlike a term plan, a money-back policy typically offers a maturity benefit, which means that if the policyholder outlives the policy term, they will acquire the sum assured along with any applicable bonuses or profits.
Savings and Insurance Combined: Money-back policies incorporate an element of savings or investment, allowing policyholders to build a corpus over time. It can help meet future expenses or life events.
Tax Benefits: Both term plans and money-back policies offer tax benefits under the 80C Section of the ITA (Income Tax Act). Still, these policies may provide additional tax advantages on the returns received and the maturity amount.

Term Insurance vs Money-back Policy: Interactive Comparison

Although many insurance companies provide money-back term plans, specific differences exist between a term and a money-back plan. Look at the table given below:

Parameters	Term Plan	Money-back Policy
Purpose	The primary purpose of a term plan is to provide life coverage for a specific term or duration. It offers financial protection to your beneficiaries in case of your untimely demise during the policy term.	A money-back policy serves a dual purpose. It provides life coverage like a term plan. Still, it also offers periodic payouts (survival benefits) at specific intervals during the policy term, even if the policyholder survives the entire time.
Coverage and Maturity Benefits	It offers no maturity or survival benefit if the policyholder outlives the term. This plan only pays the death benefit to the nominees in case of the insured's death during the policy term.	Money-back plan offers both life coverage and maturity benefits. If the policy bearer survives the term, they receive the sum assured along with any applicable profits. Additionally, the policyholder also receives periodic survival benefits during the policy term.
Premiums	These plans generally have lower premiums compared to money-back policies. Since term plans do not include any investment component, the premiums are focused solely on providing life coverage.	Money-back policies tend to have higher premiums because a part of the premium goes towards the investment component, which funds the survival benefits and maturity payouts.
Investment Component	Term plans do not have an investment component. Hence, they do not generate any savings or returns apart from the death benefit if the policyholder passes away during the policy term.	It includes an investment component, usually in the form of a with-profits fund. This fund accumulates over the policy term, and the policyholder receives periodic payouts (survival benefits).
Tax Benefits	Both term plans and money-back policies offer tax benefits under Section 80C of the ITA for the premiums paid.	In addition to the tax benefits on premiums, these policies may provide extra tax advantages on the returns received and the maturity amount.

Finding the Right Fit: Term Plan vs Money-back Policy

Choosing between a Term Plan and a Money-back Policy depends on your financial goals, stage of life, and risk preference. Here’s a quick look at who might benefit more from each type of plan:

Young Professionals with Limited Budgets: For young professionals with limited budgets, a term plan would be more beneficial. It offers maximum coverage at affordable premiums, ensuring their families are well-protected in case of unforeseen events.
Individuals with Regular Financial Goals: A money-back policy might be more suitable if you have precise financial goals, such as buying a house or funding your child's education. The periodic payouts can serve as a source of funds to meet these goals while still providing life coverage.
High-income Earners with Tax-saving Goals: High-income earners looking for tax-saving options might find money-back policies appealing due to the added tax benefits on returns and maturity amounts. However, they need to be aware that the returns might not be as significant as other investment options.
Long-term Financial Protection: A term plan remains the clear winner for those seeking long-term financial protection without any investment element. It offers a straightforward and cost-effective way to secure the future of your dependents.

To Sum Up

Deciding between a term plan and a money-back policy depends on your financial goals, risk appetite, and the level of protection you want to provide for your family. If you're going to buy a term policy, then iSelect Smart360 Term Plan Canara HSBC Life Insurance can be your best option. From a whole life cover till the age of 99 to steady income benefits, this plan offers comprehensive coverage, making it an ideal choice.

Remember to assess your needs carefully, consult a financial advisor if necessary, and choose a policy that aligns with your financial objectives and priorities. Both policies have their merits, but ultimately, the "better" policy will be the one that suits your unique requirements and helps you achieve your financial goals with peace of mind.

FAQ

When you purchase a term insurance policy, you select a sum assured, which is the amount of money that will be paid out to your beneficiaries in the event of your death during the policy term. You also choose a policy term, which is the length of time that the policy will be in effect.

If you pass away during the policy duration, your beneficiaries will receive the sum assured. However, if you outlive the policy term, you will not receive any money from the policy.

Term insurance is a suitable option for individuals seeking to provide financial security for their family in the event of their passing. This includes people who have dependents, such as children or a spouse. It can also be a good option for individuals with existing debt, such as a mortgage or car loan.

The best term plan with a money-back guarantee will be a term policy that offers a guaranteed return of premiums at regular intervals. This means that if you outlive the policy term, you will get a lump sum amount, which can be used for any purpose you choose.

No, term insurance plans do not offer maturity benefits. Term insurance plans are designed to provide financial protection to your family in the event of your death. If you outlive the policy period, you will not receive any money from the policy.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.