Participating plans: Should they be in your investment portfolio?

Only highly conservative investors who are satisfied with steady but low returns over a long span may consider them

Several life insurance companies announced record annual bonuses for 2025-26 this month. HDFC Life declared a bonus of ₹4,596 crore, Tata AIA Life Insurance announced ₹2,173 crore, and Bajaj Life Insurance declared ₹1,939 crore. Each was the highest annual bonus declared by the respective company in its history. 

These announcements may draw attention to participating life insurance plans, also called par policies. But buyers should understand the nature of these policies fully before buying them. 

Understanding a par policy 

A participating policy is a traditional, non-linked insurance plan. Unlike a unit-linked insurance plan (Ulip), its returns are not linked to market performance. 

The guaranteed portion of the survival and death benefits is defined in these policies. “Participating life insurance products offer customers a share in the surplus generated in the insurer’s with-profit fund through annual bonuses and a terminal bonus, subject to policy terms,” says Rahul Khandelwal, partner – financial services (actuarial practice), EY India. The annual bonus is paid at the end of the year. 

A participating policy also provides life cover. Premiums are defined at the outset for the full policy term. Insurers invest money collected under these policies conservatively, with capital protection being a key objective. 

These policies are different from non-participating policies. “This type of policy gives predetermined returns that are known at the time of purchase,” says Bhavna Verma, chief & appointed actuary, IndiaFirst Life Insurance. 

She adds that participating policies sit between unit-linked plans, where returns are fully market-linked, and non-participating plans, where benefits are fully guaranteed with no upside potential. 

What works 

Participating policies allow policyholders to share in the profits of the participating fund. If the insurer’s with-profit fund performs well and declares a bonus, the policyholder may receive an additional payout. 

“The maturity benefit for the policyholder is usually higher than that of a non-participating policy. Since these are long-term policies, bonuses are expected to grow as the years pass,” says Arvind Rao, founder, Arvind Rao and Associates.  

A participating policy follows the principle of smoothing. “It aims to provide an optimal but secure eventual return to policyholders,” says Verma. 

These policies offer some upside potential while ensuring downside protection. “The guaranteed sum assured and non-guaranteed bonuses in participating policies offer a cushion against market volatility,” says Khandelwal. He adds that once a bonus is declared, the insurer cannot withdraw it even if market conditions turn unfavourable later. 

Premiums qualify for deduction under Section 80C of the Income-tax Act. Maturity proceeds may be exempt under Section 10(10D), subject to prevailing premium thresholds. “Traditional plans, including participating and non-participating plans, offer tax-exempt maturity proceeds if the annual premium is up to ₹5 lakh,” says Deepesh Raghaw, a Sebi-registered investment adviser. 

Participating plans do not expose investors to market risk in the same way as market-linked products. “An investor is unlikely to face a situation where ₹1 lakh invested becomes only ₹80,000 at maturity,” says Raghaw. 

Risks buyers must weigh  

Low returns are the main drawback of these plans. “Participating plans may deliver modest returns that can sometimes be below long-term inflation,” says Khandelwal. 

According to Raghaw, the internal rate of return would be around 4–7 per cent per annum. 

Investors with a long horizon, especially seven years or more, also face an opportunity cost. “Investing in these products can lead to a loss of opportunity to earn higher possible returns from risky assets such as equities,” says Khandelwal. 

Another issue is the uncertainty of return. The payout depends on how much surplus the insurer earns and how much it declares as a bonus. “If the company has a bad year, it may choose not to declare any bonus,” says Rao. 

“The policyholder does not know in advance how much return the policy will finally give,” says Arnav Pandya, founder, Moneyeduschool. 

At maturity, the policyholder receives the sum assured and the reversionary bonuses that accrued each year. A final additional bonus may also be paid at the end of the policy term. “But none of these bonuses is guaranteed. The only assured number in a participating plan is the sum assured,” says Raghaw. According to him, low returns, combined with non-guaranteed benefits, make participating plans unattractive. 

Liquidity is another constraint. Exiting from such plans prematurely can attract heavy penalties.  

These plans also offer limited flexibility. “The sum assured of an existing policy cannot be increased, so customers may have to buy additional policies as their income or insurance needs rise,” says Khandelwal. 

Cost is another concern. “Premiums tend to be on the higher side,” says Pandya. Moreover, the tax benefit is conditional.

Who may consider them? 

Conservative investors who prefer low volatility over high returns may consider participating policies. “Participating products may work for investors seeking a debt-like instrument combined with insurance,” says Khandelwal. These buyers must have a long horizon. 

“These policies can help policyholders maintain savings discipline. They can also be useful for individuals who tend to withdraw money from open-end investment products,” says Rao. 

Participating policies may also appeal to high-net-worth individuals using them for estate planning. They can help ensure that dependants receive the estate at a predictable rate, even if the return is low. 

“The tax exemption on maturity proceeds is the only meaningful reason for some investors to consider these products,” says Raghaw. 

Who should avoid them? 

Aggressive investors who can tolerate market risk in pursuit of higher real returns should avoid participating products. “Investors who are not comfortable with a 4–5 per cent return over a 20-year term should strictly avoid these policies,” says Rao. 

Individuals who may need funds within the next six to eight years should also avoid these products.  

Those who prefer to keep insurance and investment separate should avoid them. “People who want a pure insurance cover should also stay away,” says Pandya. 

Checks before buying 

Buyers should first check the split between guaranteed and non-guaranteed benefits. “Past bonuses declared may provide some guidance. A steady trend of bonus declarations is a positive,” says Rao. Pandya suggests checking the insurer’s history of profitability. 

Finally, before buying, investors should compare participating policies with alternatives such as non-participating plans. “A non-participating plan may suit some buyers better because they know the return at the time of purchase,” says Raghaw.

Mistakes to avoid

• Do not rely on the agent’s projections based on optimistic bonus assumptions
• Don’t allow annual premium to exceed ₹5 lakh if you want tax-free maturity proceeds
• Don’t assume that the maturity amount shown in the benefits illustration will actually be received
• Don’t fail to distinguish between guaranteed and non-guaranteed portions of payout