Several life insurance companies announced record annual bonuses for 2025-26 this month, drawing attention to participating life insurance plans. HDFC Life declared a bonus of ₹4,596 crore, Tata AIA Life Insurance announced ₹2,173 crore, and Bajaj Life Insurance declared ₹1,939 crore - each representing the highest annual bonus declared by the respective company in its history. According to reports from Business Standard, these announcements may draw attention to participating life insurance plans, also called par policies, but buyers should understand the nature of these policies fully before purchasing them.
A participating policy is a traditional, non-linked insurance plan where returns are not linked to market performance. As reported by Business Standard, the guaranteed portion of survival and death benefits is defined in these policies, and participating life insurance products offer customers a share in the surplus generated in the insurer's with-profit fund through annual bonuses and a terminal bonus, subject to policy terms. The annual bonus is paid at the end of the year, with premiums defined at outset for the full policy term. According to Rahul Khandelwal, partner – financial services (actuarial practice), EY India, participating plans may deliver modest returns that can sometimes be below long-term inflation, with an internal rate of return around 4-7% per annum.
Participating policies offer tax advantages similar to other traditional insurance plans. According to Deepesh Raghaw, a Sebi-registered investment adviser, premiums qualify for deduction under Section 80C of the Income-tax Act, and maturity proceeds may be exempt under Section 10(10D), subject to prevailing premium thresholds. However, as reported by Business Standard, traditional plans, including participating and non-participating plans, offer tax-exempt maturity proceeds if the annual premium is up to ₹5 lakh. Premiums tend to be on the higher side, and the tax benefit is conditional.
The main drawback of participating plans is the uncertainty of returns, with the payout depending on how much surplus the insurer earns and declares as a bonus. According to Arvind Rao, founder of Arvind Rao and Associates, if the company has a bad year, it may choose not to declare any bonus. The policyholder does not know in advance how much return the policy will finally give, and none of the bonuses are guaranteed - the only assured number in a participating plan is the sum assured. These plans also offer limited flexibility, as the sum assured of an existing policy cannot be increased, and exiting prematurely can attract heavy penalties.
Conservative investors who prefer low volatility over high returns may consider participating policies, as reported by Business Standard. These buyers must have a long horizon and can benefit from maintaining savings discipline and avoiding withdrawals from open-end investment products. High-net-worth individuals using these products for estate planning may find them useful for ensuring dependants receive the estate at a predictable rate, even if returns are low. However, aggressive investors who can tolerate market risk in pursuit of higher real returns should avoid participating products, along with individuals who may need funds within the next six to eight years.
