Endowment policy insured is covered for specific period of term. If insured passes away during the policy term, sum assured and any bonus will be paid to nominee. Upon maturity the insured receives the sum assured and any bonus. After policy term insured is not covered.
Endowment policy – there are 2 types – endowment policies
Endowment without profit – these are also known as term polices, they offer sum assured to the nominee only upon death of insured. They are usually cheaper.
Endowment with profit – In this policies sum assured and bonus if any, will be given to nominee upon death of insured. In case insured out lives the policy term he receives sum assured and bonus if any.
This policies participate in profits of insurance company.
Money back plans
Money back plans provide both of savings and life cover. In this plans a certain amount of the sum assured is being given to the individual at regular intervals during the policy period. The balance amount is being paid during the maturity of the plan. If the policy holder dies during the policy period the nominee would get the sum assured as well as the bonus amount if any. Moreover the cash payout received at regular interval is exempted from tax. The amount of payout, terms of the policy, depends on the policy that one has opted.
The major difference between an endowment and money back policy is endowment policies do not provide returns at regular intervals. Only the survival benefits are paid at the time of maturity.
To explain further - The endowment plans pays the money, which includes the sum assured (or cover) and bonus, on the maturity of the policy. Money back policy, on the other hand, returns money usually as a fixed percentage of the sum assured to the insured during the term of the policy at some regular frequency (e.g. 5 years)
How does money back plan work?
Suppose a person takes a money back plan for 15 years with payouts of 25% of the total sum assured after every five years and rest of the sum assured at the end of the 15th year along with the additional bonus amount. So by the end of the 10th year the individual would have received 50% i.e. 25*2=50% of the total sum assured and on the completion of the policy term, the individual would have received 50% of the total sum assured plus any additional benefit if any announced by the insurance company at the time the policy was bought. The plan can also have higher term periods for ex: 20 or 25 years.
Types of bonuses
Bonuses applicable in endowment with profits and money back policies are different types as below. Bonus payment are determined and declared by life insurer if they make surplus funds after claims, costs and expenses have been paid in a particular financial year.
Simple Reversionary bonus (SRB) This type of bonus is calculated on the sum assured only. This bonus is declared annually and is accrued to be paid out at the time of a claim or maturity.
Compound Reversionary bonus (CRB) CRB is calculated as a percentage of the sum assured and all previously accrued bonuses. The bonus of each year is added to the sum assured and the next year's bonus is calculated on the enhanced amount.
Interim Bonus: Bonuses are declared at the end of the financial year. But, what if a policy matures or death occurs before the end of that period? Insurers declare interim bonus to take care of such situations and to avoid putting such policyholders at a disadvantage. The amount of bonus, however, is added to the policy on pro-rata basis for that specific year.
Terminal Bonus is also known as persistency bonus which is paid once, i.e. at the time of maturity of the policy. It is a sort of loyalty bonus given to a policyholder for maintaining the policy till maturity. Its value is not guaranteed and will be disclosed only at the time of policy maturity.
Features and benefits
1. Money back plans help an individual to plan expenses like a child’s education, purchase of cars, property or any other such financial requirement as an individual can receive cash payouts at regular interval of time.
2. Money back plans offer dual benefit of Insurance plus money at regular intervals to fulfill your periodic needs.
3. Money back and endowment plans offer guaranteed returns at low risk.
4. The individuals opting for a Money back and endowment plans can avail tax benefits under Section 80C and Section 10(10) D of the Income Tax Act, 1961.
5. Money back and endowment plans with profit, helps to provide risk cover in times of the untimely death of an individual thus providing the dual benefits of insurance as well as investments.