What is a money back insurance plan? What are accrued and terminal bonuses and how are they calculated?

Money back insurance plan is a form of life insurance which is quite popular and it addresses some of the liquidity drawbacks of a traditional life insurance products. It is the one which pays back a specific percentage of sum insured at specified fixed intervals within the policy period.

It includes a death benefit and a maturity benefit as well. Thus, it can be considered as a saving plan with benefits of both a traditional endowment and term plan which ensures guaranteed returns and addresses the old problem of liquidity with a life insurance policy. Often this type of plan in participating which means the policy holder is entitled to bonuses declared by the insurance company.

We will discuss in this article, the basics of a money back insurance product, factors to keep in mind while buying a money back policy and a few details on bonus provided with these plans.

The best way to understand a money back policy is to take a simple example. Mr. A is young, at the age of 32 he has a small and loving family of three. He is the sole earning member of his family and worried that in case of his sudden death there will be no financial back up for his spouse and kid.

He also wants some kind of maturity benefit in case he survives. He contacts a life insurance agent and is presented by a few pure term, endowment and money back plan.

A term insurance policy will only pay a death benefit if he dies within the policy period and a pure endowment policy will only pay maturity benefit if he survives the policy period. Further once paid the premium there is no liquidity and he receive nothing in between the policy period.

In the money back plan presented to him for sum insured of 10 Lakhs and policy period of 20 years there is a money back which is 10% of sum insured at the end of 12th, 15th and 18th year.

The maturity benefit is 7 Lakhs plus bonuses at the end of 20th year. Also, if death happens within the policy period a death benefit of 10 lakh adding the bonuses will be paid immediately. This complete death benefit will also be payable even if anyone or all money back instalments are already paid under the policy. Mr A likes this product variant very much as it takes care of all the three: the death benefit, survival benefit and Regular money back ensuring liquidity.

This is how a money back policy works. The money back installment will be a specified percentage of the sum insured, the number of such installments and when they will be paid will be specified in the policy. The death benefit will be the sum insured and maturity amount will be a specified percentage of sum insured with added bonuses. The pay-out structure will be different for different insurers and products.

Riders like critical illness and personal accident may be available. This is a very low risk insurance product with guaranteed returns which can be a source of regular income. All the major public and private life insurers come with variety of money back products in their bouquet. This can be purchased online or through insurance agents.

Now we will discuss what all bonuses are paid with money back product and how they are calculated. Participating or with profits insurance policies are eligible for bonus which is the variable amount the insurer declares every year as per investment income and profits generated by the life insurer for that particular financial year. Once bonus is declared it becomes guaranteed.

Simple revisionary bonus is declared as per thousand of sum insured each year and does not have the compounding power. Say in the first year, it is declared at Rs 40 per thousand Sum insured, then that year 40k will be added to the sum insured. The rate declared may be Rs 30 per thousand for the next year, then 30k will be added to the sum insured for next year.

Compound revisionary bonus is calculated by applying a percentage rate to sum insured and all accrued bonuses till then. It increases with the power of compounding. Say a compound revisionary bonus of 4% is declared for the policy term with a sum insured of 10 lakhs. In the first-year bonus will be 4% of 1000k i.e. 40k, but for the second year it will be 4% of 1040k i.e. 41.6k and so on.

Terminal or final bonus is declared in the last year of maturity thus not applicable to policies surrendered before its maturity date. A point to be noted here is, as per the product construct and conditions under which you are insured in,  for some years where profits and investment income for the life insurer is on lower side the bonus rate declared for that year will be low.

Again, it should be noted that the bonus rates and pay-outs will differ from product to product and insurer to insurer. It is better to consult the agent or insurer’s representative to avoid any confusion in the bonus rate or arriving at a tentative bonus amount which will be paid under the policy. A look out to bonus payable by the insurer in previous few year under similar money back products will be helpful to get a tentative idea.



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