While there is a relatively better understanding now regarding term insurance policies, the wealth accumulation products can be a bit confusing for the new customers.
By Anup Seth, Chief Distribution Officer, Edelweiss Tokio Life Insurance
India’s life insurance story has reached an inflection point. An instrument that had severely low awareness until recently is slowly finding popularity among a larger population as the need for financial risk management has become glaringly clear. A new breed of life insurance customers has come to the fore – they are younger, more savvy with financial planning and expect simpler solutions to address their needs. As the insurance customer undergoes change, the need for spreading awareness regarding life insurance solutions has never been greater.
While there is a relatively better understanding now regarding term insurance policies, the wealth accumulation products can be a bit confusing for the new customers. It is with this context, that I felt it critical to revisit a more basic conversation about life insurance products – what are participating and non-participating life insurance policies? What is the difference between these two product categories? Let’s find out.
Participating Life Insurance Plans
A participating life insurance policy, known as a par product in industry parlance, allows a customer to participate in the profits of a life insurance company. To explain simply, a life insurance company, like most companies, earns profits over a course of time. Participating policies allows customers to benefit from annual profits made by the company. Typically, these benefits are paid to the customers on an annual basis in the form of bonus or dividends.
These benefits are separate from the maturity benefits guaranteed by the life insurance policy. Some companies pay the accumulated bonuses or dividends and terminal bonuses at maturity of such policies. In years that the customers don’t require funds, they can let the bonus accumulate with the insurance company.
Non-participating Life Insurance Plans
A non-participating life insurance policy, known as a non-par product in industry parlance, is a conventional life insurance solution which offers guaranteed benefits to the customer as per pre-determined choices made by the customer. There are no provisions under this product wherein the customer can receive a bonus or a dividend.
So, what are the key differences between a Par and Non-Par Product?
Profit share: This is the most glaring difference between these two solutions. Par products allows customers to partake in the profits of a life insurance company, while a non-par product offers no such provision
Nature of benefits: A non-participating product offers guaranteed benefits to the life assured. This includes maturity payout, guaranteed income payouts or death benefit, depending on the product composition. A participating policy, on the other hand, has both guaranteed as well as non-guaranteed components. Since bonuses/dividends are dependent on the company’s performances, one cannot estimate any future payouts.
Level of risk: While there is yet to be demonstrated an example wherein a customer has lost out on their investment in a participating life insurance policy, they are considered relatively of higher risk than a non-par product. As opposed to a non-par plan, which has guaranteed and fixed benefits, a par plan has non-guaranteed benefits which depend on the profits of the company and therefore future bonuses can never be guaranteed. This is also the reason why non-par products carry a relatively lower premium rate.
While research is critical, the information regarding the various life insurance plans available in the market alone cannot be of service to you. Only when you are aware of your financial needs, both short and long term, can you make informed purchase decisions. Some life insurance companies also offer a more personalised solution now, wherein you can control the timing of the benefit payout to meet your unforeseen requirements. So start your journey with understanding your needs and finding the right and customisable solutions.
