Participating life insurance plans, or ‘par’ policies, allow policyholders to share in an insurer’s profits through bonuses, but the variability depends on the insurer’s financial performance and market conditions, offering potential for higher long-term gains.
Participating life insurance plans, often called “par” policies, give policyholders a share in an insurer’s participating fund rather than a fixed payoff alone. In practice, that means the value of the policy can rise if the insurer’s underlying business performs well, whether through investment gains, lower claim outgo or tighter control of expenses, according to Nakul Yadav, chief actuarial officer at Aditya Birla Sun Life Insurance. By contrast, non-participating plans offer benefits that are set in advance and do not depend on the insurer’s results.
The key attraction of a participating policy is the bonus. As Livemint has explained, these plans allow customers to share in the insurer’s profits through additional amounts that are added to the policy over time. The bonus is not guaranteed, however, and depends on the financial strength of the participating fund. That makes these policies more variable than standard guaranteed plans, but potentially more rewarding over the long term.
Yadav said the surplus in a par fund is assessed by an actuary and then split under regulatory rules. According to industry guidance and insurer explainers, India’s insurance regulator requires that at least 90% of the actuarial surplus go to participating policyholders, while no more than 10% may be retained for shareholders. The annual calculation typically takes into account investment returns, mortality experience, expenses, persistency, the number of policyholders who keep their plans active and tax-related experience.
There are generally three forms of bonus in these plans: reversionary, terminal and cash bonuses. A reversionary bonus is usually declared each year as a percentage of the sum assured and, once added, becomes part of the policy’s accrued value. A terminal bonus may be paid when the policy matures or on death, reflecting the long-term performance of the fund, while a cash bonus is paid during the life of the contract. Yadav said that, for a 20-year policy with a sum assured of Rs 10 lakh and a 5% simple reversionary bonus, the annual addition would be Rs 50,000, though he stressed that rates are not fixed and can change with market conditions, claims experience and the wider economic environment. That is why policyholders are often advised to look at an insurer’s track record before buying.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
