Table of Contents
- Participating and non participating Life Insurance Plans
- Participating Life Insurance Plan
- Working of Participating Plans
- Non-Participating Plan
- Working of Non participating Plans
- Participating Plans vs Non-Participating Insurance Plans
- Non-guaranteed vs Guaranteed Benefits
Introduction to Participating and non participating Life Insurance Plans:
Life insurance plans have several clauses and terms and it is quite obvious that you may not be familiar with all of these terms. Two very evident terms are participating and non-participating insurance. Now, what exactly are they and how do they differ from each other?
The profit provided to the policyholder is the primary difference between participating and non-participating life insurance plans. On the one hand, the insurance company, under a participating life insurance plan, is liable to share the profit of insurance with the policyholder. However, under the non-participating life insurance plan, the insurance company does not have to share any profit with the policyholder apart from the maturity benefits of the plan. Let’s understand them in detail in the further sections of this article.
What is a Participating Life Insurance Plan?
You may have heard or read the term participating life insurance plan. So, what does the term ‘participating’ imply? First of all, you must know that it is also known as a ‘Par Life Insurance Plan’. Participating plans mean the life insurance plans “participate” in the company’s bonus. Thus, these plans are more expensive than non-participating ones.
Under the Participating Life Insurance Plan, the insurance company is obliged to provide the policyholder with their share of the profit. Over the period, the insurance company makes a profit from the insurance premium paid by the policyholders. Because the policyholder is also participating in this plan, the company will share this profit in terms of dividends or bonuses.
Technically participating life insurance plans are endowment plans with bonuses. The bonus could be a simple reversionary bonus, compound reversionary bonus, interim bonus, final additional bonus or terminal bonus. All bonuses depend on the performance of the company declared on an annual basis. It also depends on the type of the plan and the policy tenure.
Even money-back or child plans can be participating in nature as there is a bonus component in some plans.
How do participating plans work?
How does a Participating Life Insurance Plan work? How do you get it and how can you make use of it? The profit of a participating insurance plan is an additional benefit. The maturity benefit is also provided along with it. Let’s see how you can make the most of your insurance benefits-
- The policyholder can choose to receive the participating insurance benefits in the form of payouts as and when agreed with the insurance company.
- The benefits of participating benefits, received in the form of dividends or bonuses, can also be deposited to earn interest on it.
So, participating endowment plans have their maturity benefit defined as sum assured + accrued simple reversionary bonus + terminal/ final additional bonus, if applicable. In case of the death of the insured within the policy tenure, even death benefit is paid out along with accrued bonuses and interim bonuses, as the case may be, to the nominee.
Just to give you an idea, here is a reversionary bonus component of LIC (2020-21). The bonus rates are given as per INR 1000 of the Sum Assured.
For Sum Assured <= INR 1 lakh
For Sum Assured > INR 1 lakh
Endowment Type Plans (Tables mentioned, i.e. plan names)
Less than 11 years
11 to 15 years
More than 15 years
Money Back Plans
So, in a participating endowment plan of 20 years with Sum Assured of INR 5 lakhs, the bonus declared is INR 38 per 1000 of Sum Assured, i.e. 38/1000*5,00,000 = INR 19,000. So, the maturity payout would be Sum Assured + declared bonus, i.e. INR 5 lakhs + INR 19,000 = INR 5,19,000. Thus, in this participating endowment plan, INR 5,00,000 was guaranteed but INR 19,000 was dependent on the company’s bonus rate declaration.
Non-participating plan in life insurance
In the non participating life insurance plan, the life assured is not able to take advantage of the profits of the insurance company that are earned by that company during the financial year. Therefore, the non participating plan is also known as a non par policy plan that does not offer payouts or dividend profits to the life assured. But the benefits of the insurance policy that are given to the life assured are pre-determined. These benefits are enjoyed by him/her when the insurance policy gets matured. They are not affected by the insurance company’s profit and loss in any way.
Working of non participating plans
The nonparticipating plans are guaranteed benefits’ endowment plans without any element of bonus involved. So, the payout to the policyholder in case of maturity or earlier death is not affected by the insurance company’s financial condition. So, whether the insurer makes a profit or not, whether it declares a bonus or not, does not affect the predefined payout in a nonpar endowment plan.
In a nonpar endowment plan, the policyholder will receive a pre-determined maturity benefit at the end of the policy tenure. On earlier death, during the policy tenure, the nominee will receive the entire sum assured and the policy would terminate. There is no bonus payable in either case.
Differences between participating plans and non-participating insurance plans:
Check out the differences between the participating and non-participating life insurance plans to better understand the two-
Non participating Plan
In the participating plan, the policyholder shares the profit of the insurance company. Therefore, this policy is also known as the policy with profit.
The life assured gets guaranteed returns when the insurance policy matures as the nonparticipating plan is subject to the company’s profitability.
This is a risk-oriented policy as the policyholder’s benefits do depend on the company’s profitability. The bonus component depends directly on the company’s profitability and is declared every year.
This is not a risk-oriented insurance policy as the policyholder’s benefits do not depend on the company’s profitability.
Guaranteed Maturity Benefits
The life insured receives a maturity benefit defined as sum assured + accrued simple reversionary bonus + terminal/ final additional bonus, if applicable. Bonus depends on the company’s profitability.
The life assured gets guaranteed returns when the insurance policy matures as the non participating plan is subject to the company’s profitability.
Depends on the company’s profitability as Death Benefit = Sum Assured + accrued Bonuses + Interim Bonus, if applicable
Does not depend on the company’s profitability as Death Benefit = Pre-defined Sum Assured.
Non-guaranteed vs guaranteed benefits
The non-participating life insurance plan offers guaranteed benefits to the life assured. These benefits are enjoyed by the life assured when the policy matures. However, if the life assured dies within the policy tenure, then these guaranteed benefits are given to the nominee.
On the contrary, the participating life insurance plan offers non-guaranteed benefits to the life assured. These non-guaranteed benefits are given in the form of bonuses based on the insurance company’s annual performance.
When planning to invest in a life insurance plan, you must understand each term so you do not have any confusion. Carefully analyze and then choose one among the par or non-par life insurance as per your future financial goals. Typically participating plans are better especially if you have faith in the life insurance company that it will do well in the future, but since it is slightly more expensive than non-participating plans, you need to choose according to your requirements. In the end, do not forget to give a thorough reading of the final insurance terms so you do not miss out on anything important.
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- What is a participating life insurance plan?
A participating life insurance plan or par life insurance shares the benefit of the life insurance between both the insurance company and the policyholder. It is paid in the form of a bonus or dividend.
- What is a non-participating life insurance plan? Under a non-par
life insurance plan, the policyholder is not entitled to receive any profit from the insurance apart from the maturity benefit of the plan. However, this is a non-risky plan as the benefit received is not affected by the profit made by the insurance company.
- Is it risky to invest in a life insurance plan?
Life insurance plans are considered to be one of the safest investment options. When considered par and non par insurance, the former is riskier compared to the latter. So, based on your requirements, you may choose one.
- Can I use the benefits of participating in life insurance to pay my premiums?
Yes. The bonuses received as the profit of the par life insurance plan can be used by the policyholder to pay off their next premium.
- Which is better: a participating or non-participating life insurance plan?
Both the plans have their pros and cons. On the one hand, you receive additional benefits under participating life insurance; on the other hand, there is no additional benefit under non-participatinglife insurance. However, non-par
is also a non-risky plan when compared to the participating insurance plan. Thus, choosing one of these plans depends on your financial goal, risk appetite, and budget.
This article is issued in the general public interest and is for educational purposes only. The blogs should not be used as a substitute for competent expert advice from a licensed professional to best suit your needs. Insurance is a subject matter of solicitation. For more details on policy terms, conditions, exclusions, and limitations, please refer/read the policy brochure before concluding a sale.
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