Simplifying Life Insurance in India
Participating Life Insurance Plan: Meaning, Benefits and How it Works
A participating life insurance policy, also known as “Par Policy”, share in the profits made by the insurance company with policyholders through their participating funds.
The par plan is designed to provide a dual benefit of insurance cover and corpus growth. Thus, in addition to the guaranteed life coverage, it also provides non-guaranteed benefits in the form of bonuses.
This dual-purpose approach can make participating insurance an attractive choice for individuals seeking financial security and the potential for long-term financial growth.
Let’s discuss the key features of participating plans, their working and how they differ from non-participating plans.
What Is a Participating Insurance Policy?
A participating policy is a type of life insurance policy where policyholders participate in share of profits made by insurance company’s participating funds. s. Apart from the life insurance coverage, it also provides additional bonus depending on the insurance company's investment gains.
So, every financial year throughout your policy tenure, if the company generates investment gains, you will get a share in the form of bonuses. These earnings can be used to pay off your due premiums or further invest it to receive interest.
What are the Features and Benefits of Participating Insurance Plans?
Participating life insurance serves as a robust investment tool that fetches you both life coverage as well as investment benefit.
So, if you are planning to purchase one, it will be wise to understand its features and benefits well. Here are some of the primary features of participating policies:
Payouts
In a participating insurance plan, the investment profits made by your insurer will be paid to you as bonuses. These payments are generally made on an annual of half-yearly basis, depending upon the fund and profits declaration by the company.Guaranteed Payment
In these policies, you will receive a guaranteed return of the sum assured as death or maturity benefits, irrespective of the profits made by your insurer.Death Benefit
The death benefit is the guaranteed amount that is paid to the nominee in case of unfortunate death of the life assured. It is generally a sum of the following:
- Sum Assured on death
- Accrued Bonuses
- Any additional benefits, if declared by the insurer
Sum assured on death is calculated as the amount highest of:
- 10 times the annualised premium
- Sum Assured on Maturity
- Death Multiple X Annualised Premium
Non-Guaranteed Payments
Non-guaranteed payments comprise the profits made by your insurer in a financial year. You will be entitled to the share. However, the profit percentage may vary depending on the company’s performance.Deferral
The policyholder has a choice to defer the payouts from their policy and accrue them to withdraw at a later stage. This helps in increasing the return by way of compounding.Cost of Insurance
Buying a participating insurance plan is costlier than regular term insurance policies, as it serves the dual purpose of life coverage as well as an investment tool.Tax-Benefits
Participating policies offer tax benefits under Section 80C and Section 10(10D) of the Income Tax Act, for the premium paid and the benefits earned respectively. The tax benefits, however, depend on the prevailing tax laws.Flexibility
In traditional par insurance plans, there is a lock-in period during which you cannot make a withdrawal of your investment. After your policy has attained a paid-up value, you can get a surrender benefit from the policy. This is one of the critical features of such policies.Premium Payment Frequency
Like most insurance policies, participating plans also allow you to pay premiums either in a lump sum or at regular intervals, monthly, quarterly, annually and bi-annually. Moreover, you can also use the profits received as dividends to pay your premiums or reinvest them for higher returns.Other Benefits
Some plans also provide benefits like interim survival benefit, guaranteed additions, or terminal bonus.How Is a Participating Plan Different from a Non-Participating Plan?
A non-participating insurance policy, in contrast to a participating insurance policy, does not pay out bonuses or dividends based on the insurer's profits. They do, however, provide guaranteed benefits when they mature. It is also referred to as a non-par policy.
Here is how par and non-par plans differ from one another:
| Basis | Non-Participating Insurance Plan | Participating Insurance Plan |
| Meaning | As a policyholder, you do not participate in the insurance company’s investment profits. Hence the name Non-Participating or Non- Par | As a policyholder, you participate in the insurance company’s investment profits and receive their profit portion as bonus. Hence the name Participating or Par |
| Premiums Charged | Insurance providers charge lower premiums from non-participating policy seekers | Premiums are comparatively higher for participating policy |
| Returns Promised | Registered beneficiaries receive assured death benefits in case the policyholder meets demise within the policy term. In certain cases, the insurer may offer maturity benefits to the insured person at the end of the plan’s tenure |
Participating insurance buyers enjoy periodic bonus payments apart from maturity benefits, if the insurance company makes profits. Besides, just like non-participating plans the beneficiaries are entitled to death benefits |
| Long-Term Costs | Long-term costs are more as there are no additional bonuses attached to a non-participating plan | Long-term costs are less as you get yearly bonuses that appreciates as per cash value policy |
| Risk factor | These plans come with little to no risk and the beneficiaries get assured death benefits | Minor risk is there as a part of your money gets invested in different financial securities, like bonds. |
Which one to Choose Between Participating and Non-Participating Life Insurance Plans?
A participating life insurance policy can be a favourable option if you are looking for a safe investment option along with secured life coverage for your loved ones.
Participating plans in India, primarily invest in safe options which are exposed to lower market risks. Therefore, you can choose a plan wisely to get dual benefits with higher profits.
Consequently, the cost of premiums is also higher for these plans. Therefore, if you are looking for low-cost options on life insurance plans, a non-par policy will better fit your needs.
With a non-participating plan, you will get a guaranteed return of the sum assured as a death or maturity benefit without being worried about the company performance.
Finally, life insurance policies are essential investment options that financially secure you and your family under challenging circumstances. Participating life insurance policies are comprehensive plans that offer dual benefits, including guaranteed life coverage and non-guaranteed returns of the investment profits your insurer makes.
Therefore, it not only takes care of your insurance needs but also serves well considering economic fluctuations and the inflationary environment. However, before choosing this plan, gathering knowledge about market conditions and different funds will be helpful to make the best of this option.
FAQs about Participating Life Insurance Plan
What are the risks of participating policies?
What are Dividends in Participating Insurance Plans?
How can Policyholders Use these Dividends from Participating Plans?
Are Participating Insurance Plans More Expensive than Non-Participating Ones?
Can Policyholders take out Loans Against their Participating Plan?
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.
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