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Non-par plans combine life insurance with guaranteed benefits. \u201cThey can provide returns as a lump sum or at periodic intervals,\u201d says Santosh Chacko, president, business strategy, SBI Life Insurance. Unlike participating policies, they do not pay bonuses or dividends linked to the insurer\u2019s profits.<\/p>\n
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Why they are gaining ground<\/p>\n
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The main attraction is visibility of future cash flows. \u201cFrom the start, they offer clearly defined benefits. Such guaranteed benefits appeal to customers during periods of global uncertainty and market volatility,\u201d says Chacko.<\/p>\n
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Returns are not linked to market movements. \u201cInvestment risk in Ulips is borne by the policyholder, whereas non-participating plans provide pre-defined guaranteed benefits,\u201d says Chacko.<\/p>\n
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Tax treatment also adds to their appeal. \u201cReturns are tax-free if the aggregate annual premium paid for non-Ulip plans by an investor does not exceed \u20b95 lakh,\u201d says Sameep Singh, head of investment, Policybazaar.<\/p>\n
\u00a0These plans can also lock in returns for long periods. \u201cThey can guarantee returns over 30 to 40 years, a timeframe that few financial instruments can match,\u201d says Mohit Garg, chief strategy officer, PNB MetLife. He adds that when combined with optional riders like critical illness and accidental death coverage, they can become powerful financial planning tools.\u00a0 \u00a0<\/p>\n
Understand the trade-offs<\/p>\n
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The returns offered by these plans, while guaranteed, can be low, ranging from 4 to 7 per cent. \u201cIf a plan offers a return of 4 to 5 per cent over about 20 years, that is an objectively poor rate,\u201d says Deepesh Raghaw, Securities and Exchange Board of India (Sebi)-registered investment adviser (RIA). If the aggregate annual premium across non-Ulip policies (purchased on or after April 1, 2023)\u00a0 exceeds \u20b95 lakh, the proceeds become taxable.<\/p>\n
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Returns may also fail to beat inflation over the long term. Liquidity is another concern. \u201cExit penalties can be very high, making it difficult to quit these plans,\u201d says Raghaw.<\/p>\n
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Who may find them suitable<\/p>\n
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Non-par plans plans may suit investors who want life cover with fixed returns. \u201cA buyer who wants no ambiguity about the outcome can consider a guaranteed-return product,\u201d says Singh.<\/p>\n
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Buyers can map them to goals such as a child\u2019s higher education or marriage, or retirement. These plans can also balance portfolios. \u201cInvestors with existing market-linked exposure can use the guaranteed component to balance portfolio risk,\u201d says Aditya Mall, appointed actuary, Generali Central Life Insurance. Buyers focused on wealth preservation and avoiding volatility may go for them.<\/p>\n
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\u201cA long-term guarantee of around 6 to 7 per cent for 20 to 30 years can appeal to buyers concerned that fixed-income rates may decline over time,\u201d says Singh.<\/p>\n
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Insurance contracts can offer features ordinary investments cannot. \u201cAn insurance-based child plan can be structured so that the insurer continues the contracted investment after the investor\u2019s death,\u201d says Raghaw.<\/p>\n
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Buyers who do not understand the product, its return or exit penalty should stay away. \u201cThese plans are also unsuitable for investors seeking high returns,\u201d says Raghaw. Those who may need the money before maturity should also avoid them.<\/p>\n
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Before buying, calculate the internal rate of return (IRR). A survival benefit expressed as a percentage of the sum assured is not the same as the IRR. \u201cA headline claim of an 8 to 10 per cent guaranteed return on sum assured can coexist with an actual IRR of only around 4 to 6 per cent,\u201d says Shilpa Arora, co-founder and chief operating officer (COO), Insurance Samadhan.\u00a0<\/p>\n
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Check benefits and payout structure<\/p>\n
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Understand the cash-flow sequence before signing. A policy may involve a premium-payment phase, a gap and then a long income stream. Confirm maturity and death payouts and when each starts and ends.<\/p>\n
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Also check how the death claim will be settled. \u201cUnder one settlement structure, the death claim is paid according to the policy schedule and the policy terminates. Under another, the nominee can continue to receive income benefits along with the maturity amount after the death claim is paid,\u201d says Arora.<\/p>\n
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Do not underestimate surrender costs<\/p>\n
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Confirm the premium-payment term. \u201cBuyers should stress-test their ability to pay premiums regularly throughout the premium-payment term. Do not overcommit based on current income,\u201d says Mall.<\/p>\n
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Do not assume you can stop after three or five years without consequences. \u201cSurrendering these policies can erode returns,\u201d says Mall. The minimum surrender value after two premiums could be around 30 to 40 per cent of paid premiums, rising as more premiums are paid.<\/p>\n
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\u201cMaintain separate liquid funds for emergencies rather than relying on early surrender of the policy,\u201d says Singh.\u00a0<\/p>\n
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Run these checks before buying<\/p>\n
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Compare effective yields across insurers for similar premiums and tenures. Check the insurer\u2019s claim-settlement track record and loan-against-policy terms. Read exclusions. For tax-free returns, keep the aggregate annual premium within \u20b95 lakh.<\/p>\n
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Do not treat a non-par savings plan as a substitute for pure protection. Mall suggests separately assessing the need for term insurance. Arora suggests using the free-look cancellation period to review the policy and reverse the purchase if it does not match what was promised or what you need.<\/p>\n
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