Young investors with a higher risk appetite are better off with a combination of term insurance and equity funds.
Life insurers are increasingly shifting towards participating (par) products to reduce balance sheet risk and cope with intense price competition in the non-par segment.
As these products gain prominence, investors must assess whether they align with their financial goals.
Decoding par plans
Non-par products offer guaranteed benefits and predictable returns. They are lower-cost options with no bonuses.
At the other end are unit-linked insurance plans (Ulips), which are entirely market-linked (invest in equity, debt, or hybrid funds) and provide non-guaranteed returns.
"The full investment risk is borne by the policyholder," says Nitin Mehta, chief distribution officer - partnership distribution and head marketing, Bharti AXA Life Insurance.
Par products lie between these two categories.
"They offer a basic minimum guaranteed benefit. Policyholders also participate in the return or profit generated by the underlying participating fund," says Vikas Gupta, chief product officer, ICICI Prudential Life Insurance.
Typically, around 80 per cent of a par fund is invested in debt and 15-20 per cent in equities and other growth assets.
Safety plus growth
Amid volatile equity markets and declining interest rates, par products appear attractive as they promise capital protection with growth.
"Their balanced structure makes them an ideal choice for individuals seeking a mix of safety and growth, aligned with their moderate risk appetite," says Gupta.
Par plans have lower guarantee levels.
"This allows insurers to allocate a larger share to equities and growth assets. This investment approach generates higher surpluses over time, which are shared with policyholders as bonuses," says Mehta.
Par products are less volatile than Ulips but can potentially deliver higher long-term returns than non-par plans. They also provide life cover throughout the term.
Expected returns
Returns depend on the par fund's performance.
"Par products in India typically generate 5 to 7 per cent internal rate of return (IRR) over 15 to 20 year holding periods, based on current bonus declaration patterns," says Sanjeev Govila, certified financial planner and CEO, Hum Fauji Initiatives.
Uncertain returns
Bonuses are not assured.
"Returns are uncertain, as bonuses depend on the insurer's performance and are not guaranteed. Policyholders know the plan's true value only much later in the tenure," says Santosh Joseph, CEO, Germinate Investor Services.
Premiums for par plans are higher than for non-par ones. Liquidity is limited.
"Early surrender leads to value erosion," says Govila.
Are they right for you?
Par policies work for low risk-takers.
"They work best for conservative families saving for goals like children's education, legacy creation, or retirement. They reward commitment over decades, not years," says Govila.
They are not suitable for those seeking low-cost protection.
Young investors with a higher risk appetite are better off with a combination of term insurance and equity funds.
Joseph says they are not for investors with short-term needs or uncertain finances.
High-net-worth individuals should note that tax breaks are capped at Rs 5 lakh premium.
"If you value transparency, control, or alpha, skip par plans," says Govila.
Checks before buying
Examine the insurer's claims record, financial strength, and bonus history over at least a decade.
Review surrender terms carefully.
Read the policy document in full and seek clarity on bonus rules.
Most importantly, match the product to your goals.
Observe premium limit for tax benefit
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff
