Choosing a suitable avenue for investing your money can be a challenging task, given the number of avenues available. There are two popular types of insurance products that people often consider to invest in: the best savings plan (like a guaranteed endowment plan or a unit-linked plan) and a money back policy. They both offer distinct benefits and are constructed differently. Understanding the differences will give insight into what each product offers and help you choose which one to buy based on what suits your family the most.
What Is a Savings Plan?
A savings plan is a life insurance policy that allows you to save for a certain amount of time. You make premium payments for a certain period, and, in turn, the insurer pays you back a lump sum amount at the end of this time. The plan also provides life coverage for the duration of the policy.
The features of a savings plan include:
- Lump Sum Payout: You can get a lump sum payout upon maturity of the policy
- Disciplined Savings: A savings plan encourages disciplined savings, as the money saved in the plan is locked for a certain amount of time
- Goal Oriented: A savings plan can be taken to meet long-term goals, such as the children’s education, buying a house, or retirement needs
Depending on the plan, you might get guaranteed returns on the money saved or fluctuating returns depending on the market.
What Is a Money Back Policy?
A money back policy is a life insurance plan that allows you to withdraw certain percentages of the sum assured at regular intervals. You get to withdraw money from the plan at regular intervals (most commonly every 4 or 5 years). In addition, you also get to withdraw a lump sum amount at the end of the policy tenure.
The features of a Money Back Policy include:
- Periodic Payouts: You get paid a certain percentage of the sum assured at regular intervals.
- Maturity Benefit: You get to withdraw the remaining sum assured at the end of the term, in addition to the survival benefits.
- Continuation of Life Cover: You continue to have life cover for the entire term of the plan, minus the survival benefits, depending on the terms and conditions of the policy.
How Do the Returns of a Savings Plan Work?
In a savings plan, your money is invested for the entire duration of the plan. As a result, the entire corpus grows on a compound interest basis or depending on the market, if it is a market-linked savings plan.
How Do the Returns of a Money Back Policy Work?
In a money back policy, as the survival benefits are paid out to you, the amount invested in the plan reduces. As a result, the corpus grows at a slower rate since there is a smaller amount being invested for the remainder of the plan term. Therefore, the net yield from a money back plan is usually lower than a savings plan for the same time period
Comparison Between Liquidity Options for Both Plans
Liquidity refers to how easily you can access your money when you need it
- Savings Plan Liquidity: A savings plan does not have much liquidity for the first few years of the plan. You might not be able to withdraw funds from the plan before its maturity date. In case you do, you might end up with lower rates of interest or even losses, depending on the terms and conditions of the policy
- Money Back Policy Liquidity: A money back policy has higher liquidity as it allows you to withdraw certain percentages of the sum assured at regular intervals. You can use this feature to plan your expenses, such as to renovate your home or to fund your child’s higher education, without having to cancel your insurance plan
Tax Benefits under New Income Tax Act, 2025
The tax benefits for both options are as follows:
Deductions on Premiums: You can claim deductions on life insurance premiums up to ₹1.5 lakh in a financial year under Section 123 (read with Schedule XV) under the old tax regime, if the following conditions are met:
The annual premium is not more than 10% of the minimum sum assured for all policies issued on or after April 1, 2012.
- Tax Exemptions on Payouts: Any amount received as maturity proceeds or survival benefits is exempt from income tax under Section 11 read with Schedule II (erstwhile Section 10(10D)) of the Income-tax Act, 1961, subject to the following conditions:
- Non-ULIP Life Insurance Policies: The aggregate sum of all annual premiums of life insurance policies should not exceed ₹5 lakh in a financial year
- ULIP Life Insurance Policies: The aggregate sum of all annual premiums of life insurance policies should not exceed ₹2.5 lakh in a financial year.
Death benefits paid to nominees under life insurance policies are always exempt from income tax.
Note: The above tax benefits are subject to change, as tax laws and regulations are subject to revision from time to time. Please consult a tax expert to know if you are eligible for any of these tax benefits.
Which One Should You Choose?
When it comes to choosing between a best savings plan and a money back policy, there are several factors to take into account. Choosing between a money back policy and a savings plan boils down to your personal preferences and financial needs.
Choose a Savings Plan if:
- You are saving up for something that is far in the future, such as higher education or retirement.
- You do not need to withdraw any money before the maturity of the policy.
- You want to maximize your wealth accumulation over a long period of time.
Choose a Money Back Policy if:
- You need access to some of the money you have saved periodically.
- You want to use money back benefits to finance specific needs at specific points in time.
- You want both life insurance coverage and periodic liquidity during the term of the policy.
Conclusion
While both the best savings plan and a money back policy are good options for most people, each one has its advantages and disadvantages. If you are looking to maximize your wealth over a long period of time, a savings plan is usually a better option. If you are looking for periodic liquidity, a money back policy is a better option. Before you buy either option, make sure to compare the two, looking at all the riders, costs, and benefits. Premiums, eligibility, and terms and conditions of the insurance policies differ from insurance company to insurance company and are subject to the terms and conditions of the respective insurers
