Linked vs Non-Linked Life Insurance Policies
Linked benefits follow fund values; non-linked benefits follow the contract. The accounts keep the two apart.
A linked policy's benefits depend on the value of investment funds. A non-linked policy's benefits do not. IRDAI's Insurance Products Regulations, 2024 put every life product in one of the two: linked products are either unit linked (ULIPs) or index linked, and non-linked products are either participating (par, sharing in surplus) or non-participating (non-par). All linked products must be non-par.
That gives three families an exam question can name: non-linked par, non-linked non-par, and linked. For IC-26 the split matters because each is accounted for as a separate business, with its own Revenue Account, its own reserving method and its own investment rules.
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The Product Categories IRDAI Uses
Schedule I, clause 2 of the 2024 product regulations. Any of these may be sold on an individual or a group basis.
Non-linked
Sub-type
Participating (par)
What it means
Policies are entitled to a share in surplus (profits) during the term, as per section 49 of the Insurance Act
Non-linked
Sub-type
Non-participating (non-par)
What it means
No share in surplus; individual non-par benefits must be stated explicitly in advance, with no insurer discretion
Linked
Sub-type
Unit linked (ULIP)
What it means
Benefits wholly or partly depend on the performance of the assets in each segregated fund offered
Linked
Sub-type
Index linked
What it means
Benefits directly linked to a publicly available index
| Category | Sub-type | What it means |
|---|---|---|
| Non-linked | Participating (par) | Policies are entitled to a share in surplus (profits) during the term, as per section 49 of the Insurance Act |
| Non-linked | Non-participating (non-par) | No share in surplus; individual non-par benefits must be stated explicitly in advance, with no insurer discretion |
| Linked | Unit linked (ULIP) | Benefits wholly or partly depend on the performance of the assets in each segregated fund offered |
| Linked | Index linked | Benefits directly linked to a publicly available index |
Linked vs Non-Linked: How the Accounting Differs
Rules come from IRDAI's financial statements regulations and master circulars; rows marked with an insurer are that insurer's published accounting policy.
Who bears investment risk
Non-linked
The insurer, for non-par business (Crisil); shared with policyholders through bonus for par
Linked
The policyholder: segregated funds meet policyholders' investment objectives and gains and losses accrue to them
Premium recognised
Non-linked
When due
Linked
When the associated units are created
Maturity claims (HDFC Life)
Non-linked
When due
Linked
On a due basis when the associated units are cancelled
Surrenders (HDFC Life)
Non-linked
On receipt of the insured's consent to the quote
Linked
When the associated units are cancelled
Policy liability (LIC)
Non-linked
Prospective gross premium method or unexpired premium reserve, at least the higher of GSV and SSV
Linked
Unit liability = NAV of units on the valuation date; non-unit liability by discounted cash flow
Debt investments (HDFC Life)
Non-linked
Held to maturity at historical cost, with premium amortised or discount accreted
Linked
At market value; unrealised gains and losses go to the Revenue Account
Equity fair value changes (HDFC Life)
Non-linked
To the Fair Value Change Account in the Balance Sheet
Linked
To the Revenue Account
Balance Sheet lines
Non-linked
Policy liabilities, insurance reserves; investments under Policyholders' (Schedule 8A)
Linked
Provision for linked liabilities; assets held to cover linked liabilities
Extra statements
Non-linked
None
Linked
A separate set of financial statements for each segregated fund, annexed to the accounts
| Point | Non-linked | Linked |
|---|---|---|
| Who bears investment risk | The insurer, for non-par business (Crisil); shared with policyholders through bonus for par | The policyholder: segregated funds meet policyholders' investment objectives and gains and losses accrue to them |
| Premium recognised | When due | When the associated units are created |
| Maturity claims (HDFC Life) | When due | On a due basis when the associated units are cancelled |
| Surrenders (HDFC Life) | On receipt of the insured's consent to the quote | When the associated units are cancelled |
| Policy liability (LIC) | Prospective gross premium method or unexpired premium reserve, at least the higher of GSV and SSV | Unit liability = NAV of units on the valuation date; non-unit liability by discounted cash flow |
| Debt investments (HDFC Life) | Held to maturity at historical cost, with premium amortised or discount accreted | At market value; unrealised gains and losses go to the Revenue Account |
| Equity fair value changes (HDFC Life) | To the Fair Value Change Account in the Balance Sheet | To the Revenue Account |
| Balance Sheet lines | Policy liabilities, insurance reserves; investments under Policyholders' (Schedule 8A) | Provision for linked liabilities; assets held to cover linked liabilities |
| Extra statements | None | A separate set of financial statements for each segregated fund, annexed to the accounts |
Separate Revenue Accounts for Each Segment
A life insurer cannot report one blended policyholders' account. Part V of the financial statements regulations makes it prepare the Revenue Account separately for:
- check_circleParticipating and non-participating policies.
- check_circleLinked, non-linked and health insurance business.
- check_circleBusiness within India and business outside India.
- check_circleAS 17 (Segment Reporting) applies to every life insurer, whether or not its securities are publicly traded, and stands modified to that extent.
- check_circleThe Unit Linked Revenue Account is further split into Non-Unit Funds and Unit Fund. Fees and charges are income in the non-unit segment and an expense in the unit segment; all operating expenses and commission sit in the non-unit segment (AFI master circular, para 5.3).
- check_circleIn practice insurers go finer. LIC and SBI Life report segments such as Non Participating Life (Individual and Group) and Unit Linked Individual Life, Individual Pension, Group Life and Group Pension.
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Where the Surplus Goes
Because the segments are kept apart, so are their surpluses. Section 49 of the Insurance Act, 1938 lets a life insurer declare bonus only out of a surplus shown in the valuation balance sheet, which is the par fund's route to policyholders. The surplus arising in non-participating funds, by contrast, may be recognised as profit in the Profit and Loss Account, even quarterly, if the accounts are audited or reviewed each quarter, the Appointed Actuary certifies the amount and the transfer does not exceed the year's profit (AFI master circular, Section III para 2).
The par and non-par split, and how bonus is accounted for, has its own page. Linked business is non-par by rule, so its surplus belongs to the non-par side.
Product Rules That Differ
From the 2024 product regulations and the June 2024 master circular on life products.
Minimum policy term, individual savings
Non-linked
Five years
Linked (ULIP)
Five years
Lock-in
Non-linked
None
Linked (ULIP)
Five consecutive completed years from commencement
Revival period
Non-linked
Five years from the first unpaid premium
Linked (ULIP)
Three years from the first unpaid premium
Suicide within 12 months
Non-linked
At least 80% of premiums paid or the surrender value, whichever is higher
Linked (ULIP)
Fund value on the date death is intimated
Death benefit
Non-linked
As stated in the policy
Linked (ULIP)
Sum assured plus fund value, or the higher of the two
| Rule | Non-linked | Linked (ULIP) |
|---|---|---|
| Minimum policy term, individual savings | Five years | Five years |
| Lock-in | None | Five consecutive completed years from commencement |
| Revival period | Five years from the first unpaid premium | Three years from the first unpaid premium |
| Suicide within 12 months | At least 80% of premiums paid or the surrender value, whichever is higher | Fund value on the date death is intimated |
| Death benefit | As stated in the policy | Sum assured plus fund value, or the higher of the two |
Exam Traps
There is no linked participating product: all linked products are non-par. Linked premium is recognised on unit creation, not on the due date. The Revenue Account split is par/non-par, then linked/non-linked/health, then India/outside India, not individual/group. AS 17 applies even to an unlisted insurer. In a ULIP, charges are income in the non-unit fund and an expense in the unit fund, never the reverse. Index linked is a kind of linked product, not a kind of non-linked one.
FAQs
What is the difference between linked and non-linked insurance?expand_more
In a linked policy the benefits depend on the value of investment funds (units or an index), and the policyholder bears the investment risk. In a non-linked policy the benefits are set by the contract, either guaranteed (non-par) or with a share in the insurer's surplus (par).
What is a non-linked non-participating life insurance plan?expand_more
A plan whose benefits are not tied to fund values and that gets no share of the insurer's profits. Under IRDAI's master circular, individual non-linked non-par products must state their benefits explicitly in advance, with no insurer discretion.
What is a non-linked participating plan?expand_more
A traditional plan entitled to a share in the insurer's surplus during its term, usually through bonuses declared out of the valuation surplus under section 49 of the Insurance Act.
Can a ULIP be participating?expand_more
No. The 2024 product regulations say all linked insurance products shall be offered under the non-par category.
Why does a life insurer prepare separate revenue accounts?expand_more
The financial statements regulations require it: separately for par and non-par, for linked, non-linked and health, and for business inside and outside India. This keeps each group of policyholders' money and results apart.
How is a ULIP's liability valued?expand_more
In two parts. LIC's accounting policy, for example, values the unit liability at the NAV of the units on the valuation date and the non-unit liability by a discounted cash flow method.
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