 "How non-participating plans by insurers work as investment option")
With markets doing well for four years, many investors turned to unit-linked insurance plans (Ulips). However, with volatility increasing, traditional non-participating (non-par) insurance plans are gaining popularity for their guaranteed, tax-free returns.
“These plans coexist with Ulips, as customers need both products that offer a guarantee and those that offer equity exposure,” says Madhu Burugupalli, senior executive vice-president and head of products, Bajaj Allianz Life Insurance.
Understanding non-par plans
There are two types of investment-cum-insurance products: Linked and non-linked. Linked plans depend on market performance and non-linked plans are unaffected by market fluctuations.
Non-linked plans can be further categorised into participating and non-participating. “Returns of participating plans depend on the insurance company’s profit pool, which is shared with policyholders. Non-participating plans offer guaranteed returns that are known upfront,” says Deepesh Raghaw, a Securities and Exchange Board of India (Sebi)-registered investment adviser.
Non-par plans typically offer returns between 5.5 per cent and 7 per cent. “Their returns are highly correlated to returns of G-Secs [government securities], into which insurers invest a significant portion of the premium left after paying agents’ commissions,” says Abhishek Kumar, Sebi-RIA and founder of SahajMoney.com.
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Guaranteed returns
The appeal of non-par plans lies in their guaranteed returns. “The risks in these plans are borne by the insurer, not the customer,” says Raghaw.
Fixed deposits allow investors to lock in interest rates for up to 10 years. “With non-par plans, investors can lock in returns for the next 10-20 years or more,” says Lakshit Mahajan, product head - investment, Policybazaar.
Interest income from most fixed-income products is taxable at slab rates, except for a few instruments like Public Provident Fund (PPF) and Employees Provident Fund (EPF), which are tax-free (return from EPF is tax-free up to a limit). Non-par plans provide tax-free returns under Section 10(10D) for premiums up to Rs 5 lakh annually. “These plans also offer life cover equal to 10 times the annual premium,” says Burugupalli.
Flexibility in payout options is another advantage. “Customers have the option to receive the discounted value of future benefits in the form of a lump sum amount, in case unexpected requirements arise. Some plans also allow customers to adjust income payout frequency,” says M Anand, president and chief distribution officer, SBI Life Insurance.
Limited returns, low liquidity
Investors with a higher risk appetite may not find the returns from these plans appealing. “Returns from some of these plans may not beat inflation. They also offer low flexibility in terms of liquidity,” says Kumar.
Raghaw says that exiting these plans can be challenging if premiums become unaffordable or the plan seems unsuitable.
Non-par plans are ideal for investors seeking long-term guaranteed returns, portfolio diversification, and tax efficiency, according to Burugupalli.
Kumar adds that risk-averse investors can include these plans in their long-term debt portfolios. They can be used for goals for which the investor does not want any uncertainty. Investors with short-term goals should avoid them.
Precautions to take
Consider the impact of inflation. "Check if the maturity amount from the policy, adjusted for inflation, will help you meet your financial goals," says Kumar.
Comparing returns of plans from various insurers is crucial. Private life insurers usually offer better rates. “Ensure the premium is affordable to avoid high penalties on discontinuation,” says Burugupalli.
The policy term should align with the investor’s goal. “Understand the policy tenure, lock-in period, surrender value, and other terms and conditions,” says Mahajan.
Enjoy guaranteed returns up to 7%
Note: Returns are for male aged 30 years. Policy term is 20 years and payment term is 10 years for all players except Axis Max Life, whose policy term is 10 years and payment term is 5 years. Monthly premum is Rs 10,000. Source: Policybazaar.com
| Insurer | Plan | Total Return (%) | IRR (%) |
| Canara HSBC Life Insurance | iselect Guaranteed Future Plus | 34,17,880 | 7.06 |
| Axis Max Life Insurance | Smart Fixed Return Digital Plan | 9,72,006 | 6.55 |
| Axis Max Life Insurance | Smart Wealth Plan | 30,03,124 | 6.18 |
| Bajaj Allianz Life Insurance | Goal Suraksha | 28,70,769 | 5.87 |
| Aditya Birla Sun Life Insurance | Assured Savings Plan | 28,69,959 | 5.87 |
| TATA AIA Life Insurance | Guaranteed Return Insurance Plan | 28,66,027 | 5.86 |
| HDFC Life | Sanchay Fixed Maturity Plan | 26,98,743 | 5.45 |
| ICICI Prudential Life | Guaranteed Income For Tomorrow | 25,76,320 | 5.13 |