While non-participating policies products were advantageous under the low-interest-rate environment, selecting for participating plans ensures both protection and rewards in the form of bonuses/dividends.
Life insurance firms reported substantial growth in non-participating or non-par policies as they released a slew of guaranteed products as interest rates fell.
Policyholders chose guaranteed policies for savings, protection, pensions, and annuities since many saw their savings and earnings reduced owing to job losses caused by the epidemic. Furthermore, they did not want to give up non-negotiable life objectives like saving for retirement or funding their children’s education, particularly in these uncertain times.
Non-participating life insurance plans do not give bonus payouts, but do provide guaranteed benefits such as the amount assured payable on the death of the policyholder or the maturity benefits due when the plan matures. A participating life insurance policy, on the other hand, provides both guaranteed benefits and non-guaranteed incentives based on the company’s earnings to the policy holder once the policy matures or to the nominee in the event of death before the end of the policy duration.
According to statistics from the Insurance Regulatory and Development Authority of India (Irdai), the percentage of non-par products (savings and protection) in individual annualized premium equivalent (APE) increased to 23 percent in FY22 from 18 percent in FY20. According to experts, the surge in demand for non-par products is due to low interest rates on fixed deposits supplied by banks and innovative guaranteed products offered by insurers due to numerous hedging alternatives.
According to Rakesh Goyal, director of Probus Insurance Broker, although participating insurance products have always been in demand, firms have introduced guaranteed policies in the past two years with interest rates at rock bottom, resulting in a surge in sales of non-participating products.
Non-par savings increased by 25-50 percent year on year for SBI Life, HDFC Life, and Bajaj Allianz Life. According to a Kotak Institutional Equities report, growth in non-par savings was significant over three years, at 45 percent for HDFC Life, 66 percent for Max Life, and 85 percent for Bajaj Allianz Life. “The percentage of non-par savings to total annualized premium equivalent has climbed almost 10-20% for most participants over the last three years,” according to the Kotak research report.
How do non-par products function?
Non-par guaranteed plans are favored by individuals who desire fixed and guaranteed returns on their money, even if the returns are modest and the premium is cheaper than those of participating policies.
To assure cash flows for non-negotiable life objectives, policyholders have the option of selecting the guaranteed payout structure based on their growing life goals. However, before deciding on a guaranteed return plan, buyers should consider the internal rate of return (IRR), which is only 5-6% each year.
Alternative strategies for participation policies
Participating policies provide both protection and rewards in the form of bonuses/dividends. The bonuses or dividends received are paid on an annual basis, and the amount of the bonus is determined by the insurer’s performance. Participating insurance plans, such as unit-linked insurance plans, may provide a policyholder with not just insurance coverage but also greater long-term returns owing to equity exposure.
What are policyholders supposed to do now?
Non-participating goods are usually advantageous in a low-interest-rate environment. Insurance businesses often provide assured products with better returns than current interest rates. Goal believes that, with interest rates anticipated to rise, one should consider participation policies. “If someone is looking at subpar items, they should wait for rates to top out because they may obtain better returns,” he adds.
According to Nayan Ananda Goswami, head of Group Business and Retail Sales & Service at SANA Insurance Brokers, fluctuating interest rates, volatile equity markets, rising inflation, and the delayed restoration of purchasing power will have an impact on the mid-income consumer segment’s spending capacity.
“The correct balance of guaranteed products and equity-linked policies should be decided with these critical aspects in mind, particularly at a time when savings preservation trumps contingent rewards,” he adds.
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GO ABOVE AND BEYOND GUARANTEES
* Participating plans, such as Ulips, provide insurance coverage as well as greater long-term returns owing to equity involvement.
* The annual internal rate of return (IRR) for a guaranteed plan (non-participating product) is just 5-6 percent.
* The share of non-par items (savings and protection) in individual APE increased to 23% in FY22 from 18% in FY20.
