Traditional life insurance plans: Know how money back, endowment plans work

In an endowment plan, the sum assured along with bonus is paid on maturity while in the money-back plan, a portion of the sum assured is paid to policyholder at regular intervals.

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These plans suit conservative investors who do not want to put money in equity even for their long term goals.

If you are looking to buy a life insurance policy that can provide life cover as well as help you save money for your future goals with a steady return, then in that case a traditional life insurance plan will be of use to you. A traditional life insurance policy could be an endowment plan, money-back plan or a whole of life insurance plan. Based on your age, term of the policy till which you want insurance coverage and the sum assured ( life coverage amount), the premium is arrived at.

On death during the policy term, the sum assured is paid to the nominee while on surviving the term of the policy, the policyholder gets the sum assured along with the bonuses. Some plans provide guaranteed additions in place of bonus as the former is known and assured to the policyholder unlike bonus which may vary each year depending on insurere’s profits. Importantly, bonuses or the guaranteed additions are declared on yearly basis but they keep accruing within the policy and are paid on death or on maturity only.

When you invest in any of the traditional plans, your money is not invested in the stock market. The volatility in returns is, therefore, absent in these plans. You can assume a steady growth of your money and arrive at an estimate of the amount that you can assume to get on maturity. They typically suit conservative investors who do not want to put money in equity even for their long term goals.

In an endowment plan, the sum assured along with bonus is paid on maturity. In the money-back plans, a portion of the sum assured is paid to policyholders at regular intervals. For example, in an endowment plan for ten years for a sum assured of Rs 1 lakh by paying annual premium of about Rs 10,000, the maturity value comes to about Rs 1.5 lakh after 10 years. In a money-back plan, there could be two payments of Rs 25000 ( out of sum assured) each after every 3 years and balance Rs 50000 on maturity along with bonus.

Two key things to know about traditional plans before buying them are – One, the return on them is around 5 per cent and secondly, the liquidity is low in them. Traditional plans are not flexible and the term fixed remains the same till maturity. While partial withdrawals are not allowed in most cases, any early exit in traditional plans proves to be costly. If you have decided to buy a traditional insurance plan, make sure to run it till maturity. In that case, you will have to keep paying the premiums till maturity. If you wish to surrender the plan later on, the surrender value is too less and will be financially damaging to you.

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