Simplifying Life Insurance in India
Difference Between Participating and Non-Participating Insurance
Source: adityabirlacapital
Life insurance plans are crucial tools that offer financial security to your loved ones when you are not around. So naturally, before making a purchasing decision, you must understand the details and terms of these policies and weigh your options accordingly.
That being said, you must also learn about the different types of insurance policies that factorise the profit earnings of the insurance company within the plan. This article will exhibit the general difference between participating and non-participating insurance policies to help you weigh your potential options.
What is Participating Life Insurance?
A participating life insurance policy, also known as a par policy, is a plan that allows you to take part in the profits made by the insurance company. You can receive these profits in the form of bonuses or dividends by the end of every financial year.
The pay-out time varies from one insurer to another. However, if you hold a participating life insurance policy, you can use these pay-outs to pay your due premium amount or invest them further to receive interest. Not to mention, these plans also include the full benefits of a life insurance plan. That means your nominees will be entitled to the specified death benefits as per the plan.
What is Non-Participating Life Insurance?
Non-participating insurance plans, also referred to as non-par plans, are the ones where you do not receive the benefits of dividend pay-outs or bonuses. Therefore, no matter how much profit your insurer gains in a financial year while you hold this policy, it will not be shared with you.
However, it offers a guaranteed death benefit on the maturity of your plan, which is regardless of the profits earned by the company.
Differences Between Participating and Non-Participating Insurance
The fundamental difference between par and non-par insurance is that one allows you to partake in the company’s profit earning, while the other does not. However, to understand the functional difference between the two, you can go through the following table:
| Parameters | Participating Insurance Policy | Non-Participating Insurance Policy |
| Share of Profits | You will be entitled to shares of profits earned by the insurance companies as bonuses or dividends. | You will not receive any type of profit shares earned by the insurance provider. |
| Guaranteed Benefits | Your insurance providers will offer you guaranteed death and maturity benefits based on the type of life insurance policy you buy. | Your insurer will offer your nominees guaranteed benefits, such as sum assured and maturity benefits, depending on the type of plan chosen. |
| Non-Guaranteed Benefits | Your insurer will offer non-guaranteed benefits in the form of bonuses and dividends depending on how the insurance company performs in the market. | Your insurer will not offer any non-guaranteed benefits as the profits are not shared. |
| Payment Mode | The death benefits or maturity benefits will be paid as a sum assured, and the profits will be shared as bonuses or dividends. | Payments are made as a sum assured in the light of the policyholder’s demise or get maturity benefits as per the selected policy. |
| Payment Frequency | Apart from the sum assured at the end of the policy term, you will receive annual payments of the earned profits. | No annual payments are made, as you cannot partake in the profit shares. |
| Flexibility | This plan offers you more flexibility as it is market-linked. | On the other hand, these plans are rather rigid as they offer a fixed amount as death or maturity benefits at the end of the term. |
| Cost of Premiums | The cost of premiums is on the higher end as these plans offer two types of benefits with added flexibility. | The cost of premiums is relatively more affordable and depends on the type of life insurance plan you select. |
Which Should You Opt Between Participating and Non-Participating Insurance?
Based on Type of Returns
For instance, participating insurance policies such as ULIPs may be advantageous as they offer the dual benefit of good returns as well as life coverage. But in case of non-participating plans, you only receive a guaranteed return.
However, note that these returns depend on how the insurance company performs in the market and other variables. Therefore, if you are opting for this type, you must be aware of market conditions and how your insurer is performing. Moreover, based on your financial goals or requirements, you can transfer the invested assets depending on their market performance.
Based on Risk Appetite
This plan can be beneficial for those with a moderate risk appetite and for those who would like to earn extra income while securing their loved ones financially. Non-participating insurance policies, on the other hand, work as traditional plans where your near and dear ones will receive a predetermined sum assured in case of your unfortunate demise.
So, if you are looking for guaranteed life coverage at cost-effective premiums, this is a favourable option. Moreover, with non-par policies, you do not have to worry about the market environment or how your insurance company is performing.
Finally, the difference between participating and non-participating insurance reveals that both options have their own value depending on the requirements of the policyholder. As such, a participating insurance policy will not be constructive if the market conditions are volatile and there is a risk that your insurer will not generate any profit.
In such situations, you can go for a non-par plan. However, when opting for the second, know that you will not be entitled to any extra income apart from a fixed sum assured.
FAQs about Difference Between Participating and Non-Participating Insurance
What are guaranteed and non-guaranteed returns?
In terms of life insurance, a participating insurance plan offers both guaranteed and non-guaranteed benefits. On the other hand, for non-participating plans, you will receive only guaranteed returns.
Guaranteed returns include the sum assured offered after the death of the policyholder or the maturity benefit received at the term’s end. At the same time, non-guaranteed returns include extra income offered as bonuses or dividend pay-outs depending on the company’s market performance.
Why should I choose a participating life insurance plan?
How do par insurance plans generate returns?
In a par policy, when you pay your premium, it gets added to an investment pool along with the payments of other policyholders. After that, the insurance company invests these funds in various market assets to generate a profit return.
These assets mainly include corporate bonds, government bonds, equity shares, properties, etc. Your insurer may also change this investment portfolio over time to get better returns. After the end of every financial year, you will receive a share of these profits as dividends or bonuses.
Important Guides related to Life Insurance
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
