Are Money-Back Insurance Plans Worthwhile for Your Child’s Future Needs?

December 7, 2021 Mutual Fund

A Money-Back Insurance Plan is one of the most popular investment-cum-insurance plans in India that is bought to achieve several financial goals, including child education and future wedding expenses. Most responsible parents start saving and investing in several financial instruments to fulfil the child’s future needs. But, are Money-Back Insurance Plans really worthwhile for your child’s future needs? Let’s find out in this article…

What are Money-Back Insurance Plans?

As we all know, in case of the unfortunate demise of the policyholder, a traditional life insurance policy or term plan provides the nominee with a sum assured in a lump sum. Therefore, a term plan is considered as a pure form of life insurance. The premium of these policies is usually lower because they do not offer any maturity benefit or survival benefit.

Apart from securing themselves with insurance cover, many individuals prefer to buy an insurance policy with an aim of creating wealth for their loved ones over a period of time. Therefore, insurance-cum-investment policies have gained a lot of popularity since their inception. However, most of these plans are long-term and come with a lock-in period of five to fifteen years. Hence, when the funds are required before the maturity of the plan, it becomes challenging to arrange for funds. Money-Back Insurance Plans solve this problem of liquidity as they offer a percentage of the sum assured to the beneficiary at regular intervals.

What are the features and benefits of Money-Back Insurance Plans?

1. It provides life insurance coverage along with investment in low-risk financial instruments.
2. It ensures that the beneficiary receives a steady income on different life stages, along with a maturity benefit.
3. The premiums qualify for a tax deduction for up to Rs 1.5 Lakhs, under Section 80C of the Income Tax Act, 1961. Whereas, if the premium paid is not more than 10% of the sum assured, you receive a tax-free maturity amount, under Section 10(10D) of the Income Tax Act, 1961.
4. As the policy invests in low-risk financial instruments, you receive a guaranteed return.
5. The average Money-Back Insurance Policy tenure is 20 years, which ensures long-term savings and returns.
6. Some insurers offer to extend the insurance coverage up to certain years, even after the maturity of the policy.
7. While the regular returns can be used to meet the expenses at different life stages, the lump-sum maturity benefit can be used to meet any long-term goal.
8. You can opt for various riders offered under the policy, such as accidental death rider, critical illness rider, hospitalisation ride, etc. to maximise the benefits of the policy.

What are the benefits of buying a Money-Back Insurance Policy for your child’s future needs?

As the Money-Back Insurance Plan is an insurance-cum-investment plan that offers steady income as well as maturity benefit, it is preferred by most parents for their child’s education. Here are some of the benefits of buying a Money-Back Insurance Policy for your child’s future needs:

1. Usually the parent is a proposer and the child is a beneficiary whose life is protected with life insurance.
2. A child receives regular income, which can be utilized for education/tuition fees.
3. The maturity benefit can be used to pay the fees of a professional course that a child decides to enrol for.
4. If a specific Child Money-Back Insurance Plan is bought, he/she starts receiving money after completing 18 years.
5. There is zero risk of losing your investment as the funds are invested in low-risk financial instruments.
6. Parents can choose the appropriate riders to secure the child’s future.
7. As discussed, parents can take advantage of the tax benefits on the premiums they have paid as well as the maturity amount.

What are the downsides of buying a Money-Back Insurance Policy for your child’s future needs?

Despite the several benefits of buying a Money-Back Insurance Policy for your child’s future needs, this policy might not be the best investment option. Here’s why:

1. A Money-Back Insurance Policy is a life insurance plan that provides life cover to your child. However, it does not make sense to secure your child’s life when he/she is just a baby! Plus, even if a parent’s life is secured in this plan, it does not provide adequate life insurance coverage to meet future needs in case of the unfortunate demise of the parent. Instead, simply invest that money in some other high-return financial instrument, and secure your life with a pure term plan. So that your child’s future is secured even in your absence.
2. The Money-Back Insurance Policies invest funds in low-risk financial instruments, such as bonds, debentures, debt instruments, fixed deposits, etc. Hence, the returns are comparatively lower than other investment avenues. Moreover, a portion of the guaranteed returns is used for regular payouts after the child turns 18, making the maturity amount even lower.
3. The rate of education inflation is 10% to 15% in India as well as abroad. Whereas, the Money-Back Insurance Policies offer guaranteed returns of only 5% to 7% p.a., which makes the plan irrelevant for a child’s education or marriage.
4. Investing the same amount of money in different medium-risk and high-risk equity mutual funds can generate much higher returns than the Money-Back Insurance Plan.
5. The regular income offered by Money-Back Insurance Policy might not be actually beneficial for a child when he/she turns 18 because (a) the maximum money will be required at the time of paying professional course fees; and (b) considering the inflation the steady returns might not be sufficient to pay any fees. Hence, the plan neither generates decent income nor decent maturity benefit.
6. If the policyholder decides to discontinue the policy, he/she gets only the surrender amount, depending upon the terms and conditions of the policy. Whereas, there are many other investment options where one can invest for a long-term without any lock-in period.
7. The Money-Back Insurance Plans usually have high asset allocation charges and underlying expenses. Since there is no cap on the expense ratio of the insurance plans, the insurance companies can charge you higher fees.

What could be the alternative investment options to meet your child’s future needs?

Among the number of available investment options for your child’s future needs, a higher-return generating diversified portfolio of equity mutual funds can generate wealth while beating inflation. If we compare the Money-Back Insurance Plans with carefully selected equity mutual funds, the insurance-cum-investment plans might not prove to be the right investment option for any long-term goal, such as child’s education, child’s wedding, etc. Although investing in equity mutual funds is comparatively risky, if the funds are carefully selected, they can generate high returns. Moreover, unless you have invested in close-ended funds schemes, there is no lock-in period or minimum investment amount to worry about. The asset allocation charges are comparatively lower as the Securities and Exchange Board of India (SEBI) has capped the expense ratio on mutual funds to 1.05%.

What are the benefits of investing in Equity Mutual Funds for your child’s future needs?

Although investing in equity mutual funds is considered to be ideal to meet a child’s future needs, picking the right mutual funds is crucial. That can be easily done by carrying out thorough research on your own or opting for a professional help. Here are some benefits of investing in Equity Mutual Funds for your child’s future needs:

1. Mutual funds schemes offer a diversified approach towards investment as it invests money in different stocks or securities, bonds, gold, etc. This diversification not only helps in reducing the risk, but also increases the returns on your investments, albeit at a certain level of risk.
2. The mutual funds are managed by professionals with years of experience and knowledge in the same field. They check the performance of the mutual funds and make necessary changes for higher returns and to reduce the risk. So, you can make a long-term investment and do not have to keep track of it on a daily basis.
3. The investment strategy of the mutual funds and allied charges are publicly declared, which makes it a transparent investment option.
4. The insurance-cum-investment plans generally have a minimum investment requirement. Whereas, there is no such minimum requirement in case of mutual funds. So, you can start investing for your child’s future needs with as low as Rs 500 and have it professionally managed.

To Conclude:

As saving for your child’s future needs, such as education or marriage, is a long-term goal, you must strike the perfect balance between risk and returns. Considering the rate of inflation and the guaranteed returns offered, the Money-Back Insurance Policy will not meet any long-term requirements of your child’s future or even your retirement. It makes sense to invest your money in a diversified portfolio of carefully selected equity mutual funds that can generate a sufficient amount to meet your child’s future needs. Furthermore, to secure your child’s future in your absence, it is advisable to buy adequate coverage of term life insurance. However, make sure you do not make any hasty decisions while investing your money and take the help of professionals to make an informed decision.

This article first appeared on PersonalFN here