A Participating life insurance plan, as the name suggests, participates in the profits of the insurance company. So, if you hear about simple reversionary bonuses, final additional bonus, and loyalty additions, you are most likely looking at a participating plan. LIC New Jeevan Anand is a Participating, non-linked life insurance plan. Clearly, the benefits are not guaranteed upfront and can fluctuate.
With a Non-Participating plan, the benefits are guaranteed upfront. Therefore, you know upfront what you will get at maturity. There is NO participation in the benefits of the insurance company.
Participating plans are different from ULIPs
ULIPs are unit linked plans. Contrast this with “non-linked” mentioned in the description for LIC New Jeevan Anand. In ULIPs, the policy holder does not participate in the profits of an insurance company.
With ULIPs, your premium after deducting mortality and other charges is invested in a fund of your choice. Your fortunes are subsequently linked to performance of the fund (and not of the insurance company).
Therefore, if you have invested in equity fund of a ULIP and equity markets don’t do well for a few years, it is quite possible that your fund value will not grow much (or may even fall). However, if the insurance company does well in general, the bonuses in a participating non-linked plans may continue as before. By the way, the reverse can happen too.
LIC New Endowment Plus, which is a ULIP, is a unit linked non-participating plan.
You can see ULIPs are actually non-participating plans. In technical terms, even a term life insurance plan is a non-participating plan.
Therefore, a non-participating plan can be a
- A Traditional life insurance plan OR
- A Unit Linked Insurance plan (ULIP) OR
- A Term Life Insurance plan
On the other hand, all participating plans are traditional plans.
To put it another way, Traditional plans can be both participating or non-participating. On the other hand, ULIPs and term insurance are non-participating plans.
How do you figure out a plan is a traditional plan?
If the plan is not a term plan or a ULIP, it is a traditional life insurance plan.
To be honest, there is no such nomenclature as a Traditional life insurance plan by the insurance regulator. Such plans have been around forever and are the ones our parents and grandparents subscribed to. Hence this name.
During those times, awareness about equity markets was low and any link to market linked returns was perhaps frowned upon.
Moreover, the investors/policy holders wanted something back for the premium they were paying. Perhaps, that’s why term insurance plans didn’t take off. Hence, the industry (at the time LIC) evolved with such traditional plans.
Participating or non-participating: Which is a lesser evil?
Returns in both the plans are quite low. Traditional plans, in general, provide low life cover and poor returns and must be avoided.
With participating plans, you may feel that you will get good returns because you participate in company profits. However, that is the not the case. Cost structure is quite heavy and opaque and you get returns in the range of 4-6% p.a.
You can expect returns in non-participating plans to be even lower since the returns are guaranteed.
There is a problem
From what I understand, the way participating plans are explained to you, even those plans may look like non-participating plans to you.
From the presentations of participating plans that I have seen, there is no linkage to the performance of the participating fund. It is as if everything is guaranteed. “Sir, you pay annual premium of Rs 50,000 and get bonus of Rs 40,000 per year.” There is no allusion that these bonuses are not guaranteed and may fluctuate.
To the credit of insurance companies, the returns are so low that it is easy to maintain the level of bonuses.
You don’t have to spend much time on whether a plan is participating or non-participating. Once you figure out the plan is a traditional life insurance plan, avoid the plan. Term life insurance is the best way to purchase life cover. Between a ULIP and a traditional plan, ULIP is the lesser evil.
I have used the plans from LIC as examples in this post. However, LIC is not the only company which comes out with traditional plans. Private insurers also come out with such poor traditional plans.
To be honest, everything else being same, I will purchase from LIC (and not from a private insurance company). For me, it is easier to trust LIC. But that does not mean that you go ahead and start purchase traditional plans from LIC. Purchase a term plan.