Life Insurance: Par or non-par policies —what’s better for you?

By Nirjhar Majumdar

In life insurance, par or participative products are those which participate in the distribution of profits, better known as valuation surplus. Non-par or non-participative products are those which do not participate in profits. The profits are distributed in the form of bonuses and are payable only when the policy results in some form of claims, maturity or death. The par policies are costlier as there is bonus loading on premiums.

If one has just started earning and has little financial resources to look after the dependents in case of very early demise, he should look at a non-par plan like term insurance. Here, a large risk cover can be purchased at a low premium.

Choice of millennials
Millennials need to save enough to meet various life goals— children’s education, buying a house and a respectable post-retirement life. For that, they should go for endowment and whole life plans, par or non-par.

A unit-linked insurance plan (Ulip) is a purely investment product with at least 60% of the fund amount invested in equities. In most cases, this rises to 80%. Here also, there is a whiff of insurance cover. But nobody buys Ulips for insurance cover. They believe that it is possible to get a high return from Ulips if they can stay invested with patience for a long time.

Selecting par, non-par policies
In par policies, the policyholders can not expect too high a bonus even if performance in a particular year is spectacular. The bonus that is declared depends on anticipated future factors as well.

Insurers avoid reducing the bonus rates. They prefer to hold back bonuses in the years of “favourable” experiences so that bonus rates can be maintained even in the years of “unfavourable” performances of the life fund.

Non-par policies are sold at much lower premiums. There are some non-par policies which offer guaranteed additions to sum assured every year, which increase as the policyholder remains loyal for longer periods. Non-par policies can be excellent from a financial planning point of view. If one knows how much he needs after, say, 15 years (perhaps for children’s higher education), one can go for a non-par plan taking into account the sum assured and all guaranteed additions. In par-policies, one never knows what the bonus will be.

Although par plans are costlier, if one takes a whole life par policy, the element of uncertainty diminishes steadily. The volatility in respect of the bases of premiums, i.e., mortality, interest rate and expenses, reflect a long-term trend in the case of par whole life policies. For this reason, whole life policies give much higher bonuses to the policyholders than other products.

(The writer is an insurance industry analyst)