Your Question Answered: What are participating life insurance plans and their advantages?

Q. I'm a 30-year-old working professional and want to invest in life insurance policies. I have heard about participating life insurance plans and want to understand what advantages they offer. How are dividends calculated and paid out in a participating policy?

I would like to commend you for paying heed to the thumb rule of investment – “earlier the better”. The other aspect that I firmly believe in is to ensure your financial portfolio is well diversified and reflects your risk profile. Participating in life insurance plans enables you to do both! At 30 years of age, the advantage you’d enjoy by investing in a participating life insurance policy is the financial head start it will provide.

Let me elaborate. Unlike regular insurance policies, a participating life insurance policy allows you to participate in the policy profits in the form of bonuses or dividends. Bonuses are typically declared on an annual basis and will depend on the overall performance of participating policies in that year. Therefore, policyholders have the chance of gaining higher payouts as the profits increase.

Now let's find out how the bonus is calculated.

- Let's assume that a policyholder buys a participating policy with a sum assured of Rs10,00,000 and the bonus rate is ₹30 per 1000 of the sum assured.

- This means for every Rs1,000 of the Sum Assured, the policyholder would receive a bonus of ₹30.

- Therefore, for the policy, the bonus amount for a year would be calculated as follows: (30/1000) * 10,00,000 = ₹30,000.

- For a 10-year policy and if the bonus rate for each year is ₹30 per 1000 of the sum assured, the bonus amount is calculated as follows: 30,000 * 10 = ₹3,00,000.

Hence, the total maturity payout will be a total of the assured amount and the declared bonuses. In this case, the maturity payout would be 10,00,000 + 3,00,000 = ₹13,00,000.

Additionally, the final maturity payout can depend on other factors such as policy terms, premium payment frequency, and any riders or additional benefits attached to your policy and, if applicable, a final year terminal bonus.

While you may have outlined your life goals, they can change with time. That's why a participating plan is a wise investment choice, as they not only offer protection but also provide enhanced returns in the form of bonuses.

Q. I am a 55-year-old government employee. Few of my non-participating insurance plans are likely to mature and I expect to receive their monthly payouts from next month. I am planning to invest for another five years and want to know if I can convert a non-participating life insurance policy into a participating one. If yes, what's the process for doing so? Also, are there any additional riders or benefits that can be added to a participating life insurance plan?

Planning for retirement is essential to not only help maintain the same quality of life during your non-working years but also help you achieve the freedom to accomplish your evolving life goals as you stride confidently into the future. 

So, while you work hard all your life to earn money, your retirement goal should be to make that money work for you by generating a steady income to progress securely into the future.

Coming to your question, a non-participating policy cannot be converted into a participating policy or vice versa. However, you can get the best out of your maturing policies by investing its monthly payouts into a new participating life insurance policy for 5 years or more. 

This approach allows you to not only maximise your existing policies’ returns but also avail tax benefits (if applicable to you) with your new participating insurance policy and extend your financial protection over a more extended period.

Additionally, participating plans offer riders that can enhance your coverage and customise your policy to meet your specific protection needs. Depending on your financial needs and goals, you can choose from a variety of riders, such as critical illness coverage, accidental death benefits, and many others. 

These riders provide additional layers of protection and financial security for both you and your loved ones, further aligning your policy with your life goals and ensuring a safe and enjoyable retirement.

Dheeraj Sehgal, Chief Distribution Officer – Institutional Business