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Life insurers are increasingly shifting towards participating (par) products to reduce balance-sheet risk, partly due to intense price competition in the non-par segment. As these products gain prominence, investors must carefully assess whether they align with their financial goals.
Decoding par plans
Non-par products offer guaranteed benefits and predictable returns. They are lower-cost options with no bonuses. At the other end are unit-linked insurance plans (Ulips), which are entirely market-linked (investing in equity, debt, or hybrid funds) and provide non-guaranteed returns. “The full investment risk is borne by the policyholder,” says Nitin Mehta, chief distribution officer – partnership distribution and head marketing, Bharti AXA Life Insurance.
Par products lie between these two categories. “They offer a basic minimum guaranteed benefit. In addition, policyholders participate in the return or profit generated by the underlying participating fund,” says Vikas Gupta, chief product officer, ICICI Prudential Life Insurance. Security comes from the guaranteed portion, while bonuses enhance policy value over time.
Typically, around 80 per cent of a par fund is invested in debt and 15–20 per cent in equities and other growth assets. With lower guarantees, insurers can take slightly higher equity exposure to improve long-term returns. Non-par plans lack such growth potential.
Safety plus growth
Amid volatile equity markets and declining interest rates, par products promise capital protection with growth. “Their balanced structure makes par products an ideal choice for individuals seeking a mix of safety and growth, aligned with their moderate risk appetite,” says Gupta.
Par plans have lower guarantee levels. “This allows insurers to allocate a larger share to equities and growth assets. This disciplined investment approach generates higher surpluses over time, which are shared with policyholders as bonuses,” says Mehta.
Par products are less volatile than Ulips but can potentially deliver higher long-term returns than non-par plans. They also provide life cover throughout the policy term.
Expected returns
Returns depend on the par fund’s performance. “Par products in India typically generate 5–7 per cent internal rate of return (IRR) over 15–20-year holding periods, based on current bonus declaration patterns,” says Sanjeev Govila, certified financial planner and chief executive officer (CEO), Hum Fauji Initiatives.
How bonuses work
All participating plans offer two types of benefits. They offer guaranteed benefits, which are fixed at the time of policy issuance and payable regardless of fund performance. They serve to reassure customers and build trust at a time when no track record of discretionary bonuses exists.
In addition, there is the bonus component, which is non-guaranteed and is declared annually based on fund performance (investment returns and expenses).
Bonuses, in turn, are of several types. One is the reversionary bonus. This is declared annually, gets accumulated in the policy, and becomes part of the guaranteed benefit payable at maturity or death. “Over time, as the product matures and the insurer builds consistency, discretionary bonuses usually form the larger component of growth,” says Mehta.
The second is the cash bonus. This is declared annually and paid immediately as income to the policyholder. The third is the terminal bonus, which is a one-time payout made at maturity or death.
Uncertain returns
Bonuses are not assured. “Returns are uncertain, as bonuses depend on the insurer’s performance and are not guaranteed. Policyholders know the plan’s true value only much later in the tenure,” says Santosh Joseph, chief executive officer, Germinate Investor Services.
Premiums for par plans are higher than for non-par ones. Liquidity is limited. “Early surrender leads to value erosion,” says Govila.
Are they right for you?
Par policies work for conservative investors. “They work best for conservative families saving for goals like children’s education, legacy creation, or retirement. They reward commitment over decades, not years,” says Govila.
They are not suitable for those seeking liquidity, low-cost protection, or aggressive returns. Young investors with higher risk appetite are better off with a combination of term insurance and equity funds. Joseph says they are not for investors with short-term needs or uncertain finances.
High-net-worth individuals should note that tax breaks are capped at ~5 lakh premium. “If you value transparency, control, or alpha, skip par plans,” says Govila.
Checks before buying
Before purchasing, examine the insurer’s claims record, financial strength, and bonus history over at least a decade. Review surrender terms carefully. Read the policy document in full and seek clarity on bonus rules. Most importantly, match the product to your goals.
Observe premium limit for tax benefit
- Premiums eligible for Section 80C deduction up to Rs 1.5 lakh a year (under old regime)
- Maturity proceeds, including bonuses, are tax-free under Section 10(10D) if premium ≤10% of sum assured and within Rs 5 lakh cap (for policies after April 2023)
- Breach of limit makes proceeds taxable
- TDS on payouts reduced from 5 per cent to 2 per cent
