Participating vs. Non-Participating Life Insurance: What's the Difference and Which One is Right for You?

The decision to choose one’s Life Insurance policy is one of the most significant decisions that an individual can take regarding future financial security for their loved ones. While there are many different types of Life Insurance plans, the underlying major classification or divide is Participating and Non-Participating Life Insurance. 

Understanding what each of these means, which types of plans fall under which category and what they provide are key to understanding the range of Life Insurance options one could choose from. Armed with this knowledge, one can confidently choose the right plan to suit one’s needs. In this blog post, we shall take a look at both and discuss how you can decide which to use.

What Is a Participating Life Insurance Policy?

Participating Life Insurance Policies such as Early Cash Plan and New Shri Vidya plan provide whole-life coverage that allow sharing in the profits of the insurer. This is paid out or added to the plan value as a bonus to the policyholder. Thus, such policies are structured to also generate potential cash value and bonus accumulation, aside from providing the death benefit.

How Does a Participating Life Insurance Policy Work?

Life Insurance companies also make a profits from their operations every year. In a Participating Life Insurance policy, the policyholder gets a portion of these annual profits or surpluses created by the life insurance company. A part of the life insurance company’s profits is distributed back to policyholders through bonus or dividends.

The bonus or dividends are given to policyholders in multiple ways: 

1. Payout as and when such bonus or dividend is declared.
2. Addition of such bonus or dividends to the policy such that they add to the maturity benefits. This is always over and above the maturity benefits guaranteed by the base Life Insurance Policy. 
3. Investment: The policyholder can opt to have the bonus/dividend allotted for investments by the Life Insurance company. In such instances the growing value of this amount will be added to the maturity value of the policy.

What are the benefits of choosing a participating Life Insurance policy?

1. Bonus or Dividends: Opting for a Participating Life Insurance plan makes the policyholder eligible to receive bonus or dividends in years when the company declares such a surplus. Because this bonus or dividend can be paid our or invested for further growth, it is a useful funds accumulation tool. This makes the plan also serve as an additional investment vehicle.
2. Guaranteed Death Benefit: As with any type of Life Insurance, Non-Participating Policies ensure death benefits that assist in securing your beneficiaries' financial futures.
3. Adding up to Maturity Value: The maturity value of the policy can be increased through the addition of bonus/dividends over the policy term. It also adds to the fund value that the policyholder can draw upon in case of need. It also enhances the maturity value over and above the guaranteed benefits of the plan.
4. Tax Benefit: Tax-free death benefits for recipients and tax-deferred cash value accumulation.

What is a Non-Participating Life Insurance Policy?

Non-Participating Life Insurance Policies such as Assured Income Plan, Assured Savings Plan and Premier Assured Benefits Plan are not eligible for bonus or dividend from the Life Insurance company’s annual performance or profits. Such plans pay out the maturity value as per the guaranteed benefits provided by the plan.

How does a Non-Participating Life Insurance policy work?

The life insurance company does not distribute a bonus or dividend to the policyholders based on the annual performance and profits. The plan will only pay the guaranteed maturity value as per the plan benefits. The main aim of this type of policy is to provide a guaranteed death benefit in case of the unfortunate demise of the policyholder.

What Are the Benefits of Selecting a Non-Participating Life Insurance Policy?

1. Lower Premiums: Non-Participating Policies usually require lower premiums compared to participating policies, therefore cost-effective in the short term.
2. Simplicity: The Non-Participating Policies have no complexities attached to them like that of a participating policy and they are straightforward-to-understand policies.
3. Guaranteed Coverage: Like the participating policy, a Non-Participating Policy also provides coverage up to death with a guaranteed amount, thereby helping the beneficiaries out.
4. Stable Payments: Non-Participating Policies ensure predictability in regard to premiums, hence easier to budget over time.

Key Differences Between Participating and Non-Participating Policies

Advantages and Disadvantages

Participating Policies

Advantages

• Earning/Value potential: Profit sharing enables the policyholder to reap increased overall financial gain.
• Cash value buildup: Cash value is potential to build up during the lifetime of the policyholder as a source of liquidity.
• Guaranteed death benefit: The death benefit ensures means that the insured value is paid out to the beneficiaries. This is done irrespective of the performance and distributable surplus and hence the term guaranteed is used to denote the same.

Disadvantages

• Higher premium: Generally, participating policies are expensive compared to their non-participating counterpart policies.
• Performance linked: Dividend or bonus is not always guaranteed. They are often likely as non-guarantee bonuses which are not predictable for policyholders to know what they will get in terms of value.

Non-Participating Policies

Advantages

• Less expensive: meaning they can afford those on a low budget.
• More straightforward: and easier to comprehend without having to worry about trying to figure out the participative bonus or dividend.

Disadvantages

• No dividends: the one with the Life Insurance policy will not benefit from profit sharing, thereby directly impacting the growth possibilities of their finances.
• Cash value: it does not normally have cash value and the money, therefore, cannot be used when the policyholder is still alive.

Which one is Right for You?

This depends on the financial goals you want to achieve and your budget. If you need to decide between participating or non-participating, here are some considerations towards making that decision:

1. Financial Goals: If you want a policy that accumulates some cash value and earns bonuses or dividends, then this would be the right kind of insurance to go for. If you want only a risk coverage without having to combine with value accumulation, then you could consider a non-participating plan.
2. Budget: You can select a Non-Participating policy if you possess a small budget and like lower premiums. If you can afford to pay higher premiums and prefer the the benefit of bonus or dividends, then you can opt for participating policies.
3. Long-term Needs: Assume you require some kind of product that will support you in financial conditions after a few years. Participating Policies can be considered both insurance and savings products; Non-Participating Insurance would mainly provide death benefits.
4. Risk Tolerance: Participating policies do carry some risk as related to the payment of dividends, which vary based on the performance of the insurance company. If stability and predictability are what you prefer and do not want the risk of uncertainty, then Non-Participating Plans might be the right options for you.

How to Choose the Right Policy?

1. Assess Your Financial Situation: You must take time to assess your finances, budget and goal. Determine how much you can afford to pay for premiums and what type of coverage you will need.
2. Research Options: Compare Participating and Non-Participating Plans provided by different companies. Compare features and benefits provided under each company and compare premium costs.
3. Get Financial Advice: Engage with an experienced financial planner or insurance officer who can provide in-depth information on the differences between the two types of policies. The same person can also explain various product plans such as Assured Income Plan, Early Cash Plan, or Premier Assured Benefit that may match the requirements.
4. Measure Long-Term Contracts: Evaluate how long you stay invested with the policy. Some insurance policies are more suitable for short periods, while others can help long-term goals.
5. Read the Fine Print: Take the time to read the actual insurance policy documents before you sign. Be sure you know all the terms, conditions, and charges for additional fees.

Understanding the difference between Participating and Non-Participating Life Insurance can make all the difference as you go about choosing what's best for your goals. Participating Policies have the potential to add on dividends and increase cash value, while a Non-Participating Policy makes things more straightforward by providing guaranteed coverage at reduced premiums.

Whichever of the options you choose, it is important to consider what might uniquely fit your financial circumstances, preferences, and long-term goals. Shriram Life Insurance has created an array of Life Insurance plans to suit a variety of financial goals, risk protection levels and affordability. With a commitment to deliver seamless digital experience, reliable customer service, Shriram Life Insurance is here to educate policyholders on the various plans they can choose. If you want to have Whole Life Insurance or want to understand your Life Insurance death benefits or explore the Life Insurance tax saving benefits, take time to do research and consider consulting professionals for further help.

For additional information on available insurance plans, refer to our Retirement Plans, Savings Plans, and Child Plans. The right choice you make today can secure tomorrow for yourself and your family.