The differences between money-back and endowment policies
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It’s quite common to hear people say they have bought an endowment insurance plan or they own a money-back policy. Both are bundled life insurance policies that offer twin benefits of savings and life insurance, and both qualify for tax deductions. But there is one big difference between the two, and that is in the way the maturity benefits are structured. Read on to know the difference.
You have an endowment policy when the maturity benefit is made available to you after a specified term; this is usually the policy term. So if you buy a life insurance endowment policy for 15 years, you are entitled to the investment benefit at the end of 15 years. This is the basic premise of an endowment plan. Even a unit-linked insurance plan (Ulip) qualifies as an endowment policy because the premiums that you pay every year get invested every year in your choice of funds, after all costs have been deducted, and at the policy term, the fund value is made available to you as the maturity benefit.
In traditional plans too, an endowment policy can be offered as a participating plan or as a non-participating plan.
Under a participating plan, the sum assured that you choose is usually the guaranteed benefit that is payable either on death or on maturity. Over and above this, every year you get an additional benefit in the form of bonuses. These bonuses come from the surplus generated by the participating fund and are declared as a percentage of the sum assured at the end of every year. Once declared, the bonuses are guaranteed to be paid on maturity or on death.
As a non-participating plan, an endowment policy will specify the maturity benefit, since non-participating plans offer guaranteed investment benefits. For example, an insurance policy can specify the maturity benefit as a percentage of the total premiums paid in the policy as maturity benefit.
While an endowment policy will pay the investment benefit at the end of the policy term, a money-back policy staggers the investment benefit throughout the policy term at regular intervals. A money-back structure is typically offered by traditional policies. So as a participating plan, that pegs the investment benefit to the performance of underlying participating fund and distributes it in the form of yearly bonuses, a money-back plan usually staggers the payment of sum assured at regular intervals during the policy term and on maturity pays the sum of bonuses.
Money backs are quite popular in the non-participating structure as well. Here, the payouts could be defined as a percentage of the sum assured or the premiums. Given that a money-back plan offers investment benefits early on, the rate of return on these plans is a tad lower compared to endowment policies.