An Endowment Plan offers Assured death benefits along with assured returns upon the Maturity of the policy. The money-back plan is a specialized endowment plan where the payout is spread over a specific number of installments instead of being repaid in a lump sum at maturity.
Both policies offer death benefits and the advantage of enhancing cover by going in for a critical illness, Accident protection, or other riders. Choosing between these two life insurance policies can be tricky because both options have their own advantages and disadvantages.
When to Choose Endowment Plans
The biggest advantage that endowment plans offer is the Premium that you pay for 20 years at a stretch earns compound interest over the period. The accumulation of premiums paid, interest earned, and the Bonus amount paid by the insurance company (this does not earn any interest) determines the sum you receive at maturity.
Allowing your money to compound for 20 – 30 years at a stretch without any withdrawals will help you enjoy fantastic returns when the payout is made. The money-back life insurance Policy loses out to endowment plans on this point because payouts are made at specific intervals. This will naturally affect the long-term benefit of compounding.
Considering this option, the smartest thing to do is to go in for endowment plans when planning your retirement. Going in for a 30-year plan when you are 25 years and investing money for 30 years at a stretch will fetch you a generous lump sum payout at maturity. You can invest the money in safe investment plans to manage your post-retirement life without any difficulty.
Choose endowment plans if you need the money after your 50th or 55th year. Choose endowment plans over money-back plans if you are planning the higher education or marriage of your children when you are 25 â€“ 30 years old.
When to Choose Money-back Plans
These investment plans are perfect for individuals who require cash at regular intervals. Investing money in the shares, Mutual Funds, gold, commodities, etc may seem more profitable but there is no guarantee of assured returns at regular intervals. If you go in for a 20-year Money Back Policy worth Rs. 10 lacs in 2012, you will be assured of a sum of Rs. 2.5 lacs in 2017, 2022, and 2027. The balance amount plus bonus will be paid in 2032. This is the biggest advantage of choosing money-back plans.
You are not subject to any conditions or restrictions as far as the usage of the money is concerned. You can use it to invest in retirement plans, or invest in life insurance for your child as you deem fit. You can also use the money to go in for high-Risk investment plans that offer high returns.
This is a simple and elegant way to take care of your cash flow at regular intervals. The money will be very useful to tide over emergencies like loss of a job or a sudden downturn in business.
The debate between endowment and money-back policies cannot be viewed in isolation. Every investment portfolio must be properly balanced. Focusing solely on mutual funds or exchange-traded funds or sticking to term, endowment and money-back policies alone does not make sense.
An individual desirous of earning 20% returns over a span of 20 years cannot stick to safe options like endowment plans that invest in 6-7% government securities. However, ignoring this completely may make the person vulnerable to market fluctuations; something that does not affect endowment and money-back plans negatively.