Difference Between Participating and Non-Participating Insurance

Overview of Participating Vs. Non Participating Life Insurance Policy

 

Savings-oriented life insurance plans offer dual benefits – they provide insurance coverage against the risk of premature demise during the policy tenure and they also help you create a savings corpus for your financial goals. Moreover, in some plans, you might also earn bonus declarations (if declared by the company) which help in enhancing the policy benefits.

Thus, traditional life insurance plans, like endowment, money back etc., are offered as participating or non-participating plans depending on the bonus additions. Plans which offer bonus are called participating plans while those that don’t are called non-participating plans. Let’s understand in details.

 

What Is A Participating Life Insurance Policy?

 

A participating life insurance policy is one which earns a bonus if the insurance company declares a bonus. These plans are also called with-profit plans since they participate in the profits earned by ‘company which is pooled under the With Profit Fund

The features of participating or with-profit life insurance plans are as follows¹ –

• Not all life insurance plans are offered as participating plans. If the plan mentions the words ‘participating’ or ‘with profit’ plans then only the bonus is added to the plan’s benefits.
• The profits are distributed either in the form of bonuses.
• The bonus is expressed as a percentage of either the sum assured or Sum Assured plus Accrued Bonuses, depending on the product conditions.. So, if you choose a sum assured of ₹10 lakhs and the bonus of5% is applicable on Sum Assured, you will earn a bonus of ₹50,000.
• Bonus, once announced for the year, becomes guaranteed and does not change over the policy tenure.
• You are eligible for the bonus if you have paid the due premium. If the premium is unpaid and the policy is lapsed, no bonus will be added. However, the bonus that you have earned earlier would not be affected.
• A terminal bonus might be declared on death or maturity or even surrender.
• An interim bonus might also be declared by the insurance company for policies under which the benefits are being paid after payment of due premiums between two bonus declaration dates.

 

Benefits of Participating Life Insurance Policy

 

Some benefits of participating life insurance policies are as follows –

• Bonus additions add to the death and maturity benefits and give an enhanced benefit.
• The bonus is offered either on a compounding basis or on a simple interest basis. Under the compound interest basis, you keep earning bonus additions on the bonus previously earned. This helps in enhancing the overall bonus additions and creating a good corpus. On the other hand, under the simple interest basis, the bonus is calculated as a percentage of the sum assured.
• An increased corpus may give you sufficient funds for your financial goals.
• Bonus payouts are not taxed in the case of death benefits2. Even in maturity benefits, if the maturity proceeds qualify for tax exemption under Section 10(10D), the bonus is tax-free. The rules for exemption is as follows –
  • The maturity benefit, including bonus, is tax-free if the premium is up to 10% of the death sum assured for policies bought on or after 1st April 2012. If the policy is bought before this date, the premium should be up to 20% of the death sum assured. If the policy is bought on or after 1st April 2013 and the policyholder suffers from a disability or disease specified under Section 80DDB or Section 80U, the premium should be up to 15% of the sum assured³.
  • The availability of above deductions is subject to the tax regime selected.

 

What is a Non-Participating Life Insurance Policy?

 

Contrary to a participating life insurance policy, a non-participating policy is one where no bonus is declared. In some plans, addition or loyalty addition might be added to the corpus in the absence of a bonus.

 

Features Of Non-Participating Life Insurance Policies

 

Some of the salient features of non-participating life insurance policies are as follows –

• The death and maturity benefits are guaranteed *and can be assessed beforehand since there is no variable bonus attached to them.
• Non-participating plans might offer additional benefits in the form of guaranteed^** additions or loyalty additions.

 

Benefits of Non-Participating Life Insurance Policy

 

Some of the benefits of a non-participating life insurance policy are as follows –

• You can create a corpus for your financial goals while enjoying insurance protection too
• The premiums paid and the benefits received qualify for tax benefits

 

Difference Between Participating and Non-Participating Insurance

 

Participating and non-participating Life insurance not only differ in terms of bonus additions, there are other differences too. Some of the common differences between participating and non-participating insurance are as follows^{4, 5 and 6} –

 

Who Should Buy Participating and Non Participating Plans And Why?

 

You can buy a participating life insurance policy if –

• You want to accumulate a higher corpus for your financial goals with the help of bonus additions (if declared by the insurance company)
• You don’t mind paying the additional premium to be eligible for earning bonuses

On the other hand, you can choose a non-participating life insurance policy if –

• You want a basic life insurance policy to cover the financial risk of premature demise and provide financial security to your family.
• You want to save on the added premium cost
• You need guaranteed benefits on maturity or premature demise to plan for your financial goals

 

Conclusion

 

Participating life insurance plans may have an added edge over non participating plans because of the added bonus that they may offer. Non participating plans, on the other hand, offer basic coverage at cost-effective premiums. Moreover, if you choose ULIPs (unit-linked insurance plans), you can get market-linked returns, with the risk component involved, even when you don’t earn a bonus.

So, assess your financial needs and then choose a suitable policy among participating and non-participating plans.

 

FAQs

 

1. What are the examples of participating and non-participating plans?

Endowment and money-back plans can be offered as participating life insurance plans wherein the bonus additions enhance the corpus. On the other hand, term insurance plans, guaranteed saving plans and ULIPs can be offered as non-participating plans which do not offer bonuses.

2. How does a participating life insurance policy work?

Under a participating life insurance policy, the premium you pay is pooled into a corpus which the insurance company invests in specific instruments as directed by insurance norms. The returns earned from the investment are distributed to policyholders in the form of bonuses. Youmay get a bonus if the insurance company earns a profit in a financial year. The rate of bonus depends on the profit earned. Bonus is not guaranteed and expressed as a percentage of the sum assured¹.

Once declared, it becomes a part of the guaranteed* benefit and is added to your corpus¹.

3. How does a non-participating life insurance policy work?

Under a non-participating life insurance policy, no bonus is declared. You will be given a specified death or maturity benefit. If the insured passes away during the policy tenure, the guaranteed* death benefit is paid. On the other hand, if the insured survives the policy tenure, the guaranteed* maturity benefit is paid⁴.

Reference

1. https://www.insuranceinstituteofindia.com/downloads/IC38/ALEnglish.pdf (page 148 to 150)

2. https://www.livemint.com/money/personal-finance/how-life-insurance-policies-are-taxed-11665145664260.html

3. https://incometaxindia.gov.in/tutorials/20.%20tax%20benefits%20due%20to%20health%20insurance.pdf

4. https://www.hindustantimes.com/brand-stories/4-differences-between-participating-and-non participating-life-insurance-policy-101661946422439.html

5. https://www.financialexpress.com/money/insurance-what-are-the-differences-between-participating-and-non participating-life-insurance-policies-2706197/

6. https://mintgenie.livemint.com/news/personal-finance/participating-and-non participating-life-insurance-how-to-choose-between-the-two-151682501108536

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