There are many types of life insurance policies available in India today. While life insurance is necessary in every portfolio, you should know more about its two broad categories, i.e., participating and non-participating policies, before investing. Here is a guide to these key policy types and their differences.
What is Life Insurance?
Life insurance policies offer financial security to the nominees/family/dependents of the person insured in case of their unfortunate demise. The insured can ensure the future financial wellbeing of their family with a life insurance policy while enjoying greater peace of mind. The payout from the insurer will enable the family of a policyholder to replace the lost income of the deceased person, thereby keeping them financially comfortable for the most part. The death benefits in these plans are also free from tax deductions under section 10D of the Income Tax Act, 1961.
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The policy is terminated in case of the demise of the person insured or upon the completion of the policy tenure. While pure life insurance comes with just the death benefits for nominees, there are some policies that provide survival/maturity benefits too. These are long-term policies, and premiums may depend upon the policy type and policyholder's age. An online life insurance premium calculator can be utilized to calculate your total outgo.
What is a Participating Life Insurance Policy?
A participating life insurance policy allows the policyholder to partake in the insurance company’s profits. As part of these policies, the insurer pays bonuses/dividends to the policyholder from their annual profits.
If you have purchased a participating life insurance policy, you can receive these payouts as and when sanctioned by the insurer. You can also deposit your yearly bonus/dividend with the insurer, allowing you to earn interest on it. These benefits are over and above the maturity benefits guaranteed by the life insurance company. Some life insurance companies pay the accumulated bonuses/dividends and terminal bonuses upon maturity (if any) for participating life insurance policies.
What is a Non-Participating Life Insurance Policy?
These policies do not have any bonuses/dividends paid out to policyholders by insurance companies, i.e., they do not share in the profits made by these companies. This is because these are more conventional life insurance plans. Moreover, these policies remain fixed in terms of the maturity benefits/death benefit that is payable for the life assured. Hence, they do not have any such provisions for earning dividends/bonuses as a share in the profits of the life insurance company.
The Key Differences Between Participating & Non-Participating Life Insurance
Here are the 4 key differences between these two life insurance policy types:
1. Profit Share - Participating life insurance plans help policyholders participate in the profits of insurance companies, while non-participating life insurance policies do not come with this benefit.
2. Non-guaranteed and guaranteed benefits - In the case of Non-participating plans, the policyholder is only entitled to receive the benefits guaranteed by the insurer. These include the death benefit, as well as the maturity benefit of the policy. On the other hand, participating plans provide both guaranteed benefits (death and maturity benefits) and certain non-guaranteed benefits such as bonuses/dividends that the insurer pays out from their profit.
3. Frequency of payments - The policyholder gets annual bonuses or dividends in participating life insurance policies. These benefits are unavailable in the case of non-participating life insurance plans.
4. Flexibility Aspects - There is the highest possible flexibility available for policyholders in the case of participating life insurance plans. You can easily redirect or shift your invested funds/assets as per your needs or their market performance, like in the case of market-linked policies. At the same time, non-participating life insurance plans are rigid since the applicable benefits stay fixed at the time of issuing the policy.
Which one should you choose?
Participating insurance policies such as ULIPs may be beneficial for some investors since they get the dual benefit of attractive returns and life coverage. Of course, the returns will depend upon the company's market performance and other factors. However, there are tax benefits on the amount you invest, the benefit amount, and the amount withdrawn. ULIPs are participating policies that offer tax benefits, returns, and steady life coverage. There are, of course, moderate risks associated with these policies.
Non-participating policies have zero risks since they have guaranteed benefits and no payouts. However, you get only life insurance coverage in this case. This is a more basic type of coverage and often comes with a slightly lower premium as well. Therefore, this is more suitable for completely risk-averse investors who are not inclined toward wealth creation.
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