As market volatility increases, many investors are shifting their focus from equity-linked products like Unit-Linked Insurance Plans (ULIPs) to traditional non-participating (non-par) insurance plans. These plans, known for their guaranteed returns and tax-free benefits, are gaining traction as a safe and stable investment option.
Why Non-Participating Plans Are Gaining Popularity
For the past few years, ULIPs were a popular choice for investors seeking equity exposure. However, with market uncertainties increasing, non-par insurance plans have emerged as an attractive alternative. According to Madhu Burugupalli, Senior Executive Vice President and Head of Products at Bajaj Allianz Life Insurance, non-par plans coexist with ULIPs, offering investors a balance of guarantees and equity exposure.
Understanding Non-Participating Plans
Insurance products are generally classified into two categories: linked and non-linked. While linked plans, such as ULIPs, are directly tied to market performance, non-linked plans are unaffected by market fluctuations and provide more stability. Non-linked plans are further divided into two types: participating and non-participating.
In a participating plan, policyholders share in the insurer’s profits, meaning returns depend on the company’s financial performance. In contrast, non-participating plans offer fixed, guaranteed returns, providing more certainty to investors. As Deepesh Raghaw, a Sebi-registered investment adviser, explains, these plans promise predefined returns that are known upfront.
Guaranteed, Tax-Free Returns
One of the biggest attractions of non-par plans is their guaranteed returns, which typically range between 5.5% and 7%. These returns are closely linked to the performance of government securities (G-Secs), into which insurers invest a significant portion of the premiums after covering operational costs, such as agent commissions.
Unlike fixed deposits, which may be taxable, non-par insurance plans provide tax-free returns under Section 10(10D) for premiums up to Rs 5 lakh annually. Furthermore, these plans offer life cover equal to 10 times the annual premium, making them a compelling option for long-term investors. “The risks are borne by the insurer, not the customer,” says Raghaw.
Investors can lock in returns for a long-term horizon, with many plans offering tenures of 10 to 20 years or more, providing them with a stable source of income for the future. “Non-par plans allow you to secure your returns for the long term,” adds Lakshit Mahajan, Product Head for Investment at Policybazaar.
Flexibility and Payout Options
Another significant advantage of non-par plans is their flexibility in payout options. Investors can opt to receive the discounted value of future benefits in a lump sum if urgent cash needs arise. Some plans also allow policyholders to adjust the frequency of income payouts to suit their financial needs.
Limitations: Low Liquidity and Modest Returns
Despite their appeal, non-par plans may not be suitable for all investors. For those with a higher risk appetite, these plans might not provide returns that outpace inflation. Abhishek Kumar, Sebi-registered investment adviser and founder of SahajMoney.com, points out that while these plans are stable, their returns might not offer substantial growth over time.
Liquidity is another challenge. Exiting these plans can be difficult if premiums become unaffordable or if the plan no longer aligns with the investor’s financial goals. Investors seeking higher returns or more flexible options may find non-par plans less appealing.
Ideal for Long-Term, Risk-Averse Investors
Non-participating insurance plans are most suitable for risk-averse investors looking for guaranteed returns and tax efficiency. Burugupalli recommends these plans for investors who want certainty, especially for long-term goals like retirement or children’s education. However, investors with short-term goals or higher risk tolerance should look for alternative options.
Precautions for Investors
While non-par plans offer many benefits, it’s important to keep a few things in mind. Inflation can erode the purchasing power of the maturity amount, so investors should assess whether the maturity value will help meet their long-term financial goals.
Additionally, comparing plans from different insurers is crucial. “Private life insurers often offer better rates, so it’s important to evaluate all options,” says Burugupalli. It’s also important to ensure the premium is affordable to avoid high penalties for policy discontinuation.
Investors should also consider the policy term, lock-in period, surrender value, and other terms and conditions before committing to a non-par plan, advises Mahajan.
Conclusion
Non-participating insurance plans offer a solid investment choice for those looking for stability and guaranteed returns. While they may not deliver the high returns associated with riskier investment products, their appeal lies in their ability to provide long-term financial security, especially for risk-averse individuals.
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