Stock Fundamentals

Simply Put: Participatory policies

Sai Prabhakar. Y _11519 | Updated on: Jan 13, 2022

What are you participating in with a par policy?

Sai Prabhakar Yadavalli

BL Research Bureau

With his first salary in account, Rajesh is considering either investment or insurance. Sudhir, his elder brother suggests that either a participating or a non-participating plan can fit the bill. The two have a conversation on what would be a better fit for Rajesh.

Rajesh: What is that plan that you are suggesting for my first investment?

Sudhir: You can have investment and insurance in one product. So, there are two basic plans to achieve that, a participating plan (par) and non-participating (non-par). A par plan allows you to receive a share on profits of the insurance company apart from the benefits guaranteed at maturity or death. The policy will accumulate all policyholders’ premiums, carve out the insurance portion of the premium and invest the rest. The investment profits are shared with you in the form of dividends or bonuses, reducing future premiums or providing income. A non-par plan will guarantee end of term benefits and will not pay any periodic dividends.

Rajesh: The insurance part is fine but what if they don’t make any profits?

Sudhir: The risk is essentially what you are participating in. The insurance companies transfer the risk of returns to the policyholder while retaining the investment risk in guaranteed benefits plan. The investments of insurers, par or non-par, are regulated by IRDAI. Par plans chasing higher returns, confirming to policyholders’ choice, allocate a higher proportion to equities compared to non-par investing in G-sec/corporate bonds.

Rajesh: Seems like the par policies offer flexibility in structure.

Sudhir: Yes, non-par policies are comparatively simple offering because of their rigid structure compared to par. Par policies offer a choice of fund and movement between funds and tax exemptions including at the time of investment, dividend, and maturity. Mind you, unit linked plans that are quite famous, are also an example of par policies, which shows the interest and range of options that are available.

Rajesh: Because of their equity and return-maximizing orientation, par policies would most likely give higher returns?

Sudhir: Should I repeat the statutory warning! Investments are subject to market risk. In capital markets, “should expect” is vastly different from “can expect”. You should expect higher returns when assuming higher risk. But this does not and cannot translate to – higher returns with higher risk. Returns from par policies will have a higher correlation to market performance than non-par policies (non-par still have to invest in market facing but low volatility products). The fund performance in capturing the highs and lows is another added layer of volatility. Products with same exposure have returned ranging from 8-15 per cent in par policies in the last 7 years, while non-par’s range would be narrower from 5-6.5 per cent.

Rajesh: Got it. So looks like I would benefit from a par policy?

Sudhir: You can benefit from either, depending on what you are looking to achieve. A non-par policy is for non-negotiable life goals which must be achieved whatever the market condition, like retirement funding. A par-policy is designed to combine the long duration of insurance investing with better ability to absorb capital market shocks, in delivering a above average growth for other non-core goals which can be exposed to market. So, figure out what you looking to achieve and then search for the right product.

Rajesh: Wow, thanks for the detail. Now I can shop for a more suitable product.

Sudhir: And a large pizza for me.

Published on January 13, 2022

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