A friend told me that money back schemes of life insurance companies are better than fixed deposits because they give tax free returns. Is it true?
Radheyshyam Gupta, Delhi
The benefit of taking a money-back plan is that during the term of the policy, the insured receives tax-free, fixed proportions of the sum assured at regular intervals. On maturity, the insured receives the balance portion of the sum assured plus the bonus or participating profit or guaranteed addition for the term of the policy, which is also tax-free in most cases. This plan is suitable for people who require lump sum amounts in future to meet specific expenses such as children’s education or marriage. The policy provides insurance protection for the family as well as provision for old age.
On the other hand, interest on fixed deposits is fully taxable, unless it is deposited in the 5-year tax planning scheme, under which tax deduction on deposits can be claimed. However, money-back policies need commitment to pay for a long duration, like 15 to 25 years, and charge you for providing life insurance cover. So effectively your premium less charges is invested for returns. Also, you need to compare the returns from a fixed deposit to the returns from money back for the same time duration.
