Participating vs Non-Participating Life Insurance Policies
One shares profits through bonuses, the other pays only what the contract says. Here is what that changes for the insurer's books.
A participating (par, or with-profits) policy shares in the insurer's profits through bonuses. A non-participating (non-par) policy pays only the benefits written into the contract. That one difference changes who carries the risk, how the product is priced, and how the insurer must keep its books.
Par or non-par is the first of the five classifications IRDAI's Master Circular on Life Insurance Products (12 June 2024, para 8) makes every product document state. The others are linked or non-linked, life/pension/general annuity/health, individual or group, and savings or pure risk.
You save ₹250
- Full 100-question mocks
- Chapter-wise practice
- Section-wise sets
One payment, no subscription · Valid for 1 month
Participating vs Non-Participating at a Glance
Benefits
Participating (par)
Guaranteed benefits plus bonuses. Bonus not paid earlier becomes part of the death benefit (para 19)
Non-participating (non-par)
Individual non-linked non-par: benefits stated explicitly in advance, with no insurer discretion (para 17)
Who carries the risk
Participating (par)
Shared: the insurer shares risks and rewards with policyholders through bonuses and dividends (Crisil)
Non-participating (non-par)
The insurer bears the investment risk (Crisil)
Profit margin for the insurer
Participating (par)
Moderate (Crisil)
Non-participating (non-par)
Higher, because the insurer bears the risk (Crisil)
Typical examples
Participating (par)
Participating endowment and whole life plans, which can add bonuses (Tata AIA)
Non-participating (non-par)
Term, annuity and guaranteed-return endowment (Crisil)
Revenue Account
Participating (par)
Prepared separately
Non-participating (non-par)
Prepared separately
Where surplus goes
Participating (par)
Bonus to policyholders, only out of valuation surplus (Insurance Act, section 49)
Non-participating (non-par)
May be recognised as shareholders' profit quarterly, subject to conditions
| Participating (par) | Non-participating (non-par) | |
|---|---|---|
| Benefits | Guaranteed benefits plus bonuses. Bonus not paid earlier becomes part of the death benefit (para 19) | Individual non-linked non-par: benefits stated explicitly in advance, with no insurer discretion (para 17) |
| Who carries the risk | Shared: the insurer shares risks and rewards with policyholders through bonuses and dividends (Crisil) | The insurer bears the investment risk (Crisil) |
| Profit margin for the insurer | Moderate (Crisil) | Higher, because the insurer bears the risk (Crisil) |
| Typical examples | Participating endowment and whole life plans, which can add bonuses (Tata AIA) | Term, annuity and guaranteed-return endowment (Crisil) |
| Revenue Account | Prepared separately | Prepared separately |
| Where surplus goes | Bonus to policyholders, only out of valuation surplus (Insurance Act, section 49) | May be recognised as shareholders' profit quarterly, subject to conditions |
Where ULIPs Fit
Linked or non-linked is a separate classification. Crisil treats ULIPs apart from traditional par and non-par policies: the investment risk falls entirely on the policyholder and the insurer's margin tends to be low. IRDAI's expenses of management rules group linked business with non-par.
How the Accounts Keep Them Apart
This is the IC-26 angle: the two kinds of business are never mixed in the books.
- check_circleSeparate revenue accounts: IRDA's financial statements regulations require the Revenue Account to be prepared separately for participating and non-participating policies.
- check_circleSeparate expense limits: the IRDAI Expenses of Management Regulations, 2024 monitor life insurers in three segments (linked, non-linked non-participating, non-linked participating). Expenses must stay within limits for par policies on an overall basis, and for non-par (including linked) on an overall basis; any excess is charged to the Profit and Loss Account.
- check_circleReserves include bonus: the policy liability must be big enough, with future premiums and investment income, to meet all future claims including bonus entitlements, and expenses.
- check_circleRevenue Account appropriations: transfer to the Shareholders' Account, to other reserves, and to Funds for Future Appropriations (FFA). The liability shown is mathematical reserves after allocation of bonus.
- check_circleFFA: in non-linked par business, LIC describes FFA as funds not yet allocated to policyholders or shareholders at the balance sheet date.
- check_circleRevaluation reserve: nothing from it goes to shareholders, apart from amounts IRDAI directs to be released to policyholders for bonus.
Quick practice on accounts and ratios. No signup.
Surplus Rules: Par vs Non-Par
From IRDAI's master circular on actuarial, finance and investment functions, Section III.
| Rule | What it says |
|---|---|
| Bonus only out of surplus (par) | Under section 49 of the Insurance Act, 1938, no life insurer may declare bonus except out of a surplus shown in the valuation balance sheet |
| Par fund in deficit | To declare bonus anyway, shareholders must first make good the deficit and transfer assets to cover the bonus cost. The transfer is irreversible, needs a special resolution, and paid-up capital must be raised within six months |
| How long that route lasts | Only for the first twelve financial years of life operations; after that, bonus is expected to come from surplus within the life fund |
| Bonus rates | Proposed rates should be sustainable over the future |
| Non-par surplus, quarterly | May go to the Profit and Loss Account each quarter if the statements are audited or limited-reviewed, the Appointed Actuary certifies the transfer, and it is disclosed |
| Non-par true-up | The amount transferred must not exceed the yearly profit; the difference is adjusted in the fourth quarter. A variation over 10% or ₹5 crore, whichever is higher, needs a Board-approved explanation to IRDAI |
Exam Traps
Non-par: the insurer bears the investment risk and earns the higher margin. Par: risk and reward are shared through bonuses. ULIP risk sits with the policyholder, which is neither of those. Par and non-par need separate revenue accounts. Bonus comes only out of valuation surplus (section 49). Shareholder support for a par deficit is irreversible and limited to the first twelve years. The non-par variation threshold is 10% or ₹5 crore, whichever is higher.
FAQs
What is the difference between a participating and a non-participating policy?expand_more
A participating policy shares in the insurer's profits through bonuses, so risks and rewards are shared. A non-participating policy pays only the stated benefits, and the insurer carries the investment risk.
Is term insurance participating or non-participating?expand_more
Non-participating. Crisil lists term, annuity and guaranteed-return endowment as non-par policies where the insurer bears the investment risk.
Why do insurers earn a higher margin on non-par policies?expand_more
Because the insurer bears the risk. Crisil calls non-par margins higher and par margins moderate.
Can a life insurer declare bonus when its participating fund is in deficit?expand_more
Only if shareholders first make good the deficit and transfer assets to cover the bonus, and only in the first twelve financial years of life operations. The transfer can never be taken back.
Are par and non-par shown in one revenue account?expand_more
No. IRDA's financial statements regulations require separate revenue accounts for participating and non-participating policies.
Access exam-specific mock tests directly from your Android device.Next steps
- IC-38: Types of life insurancearrow_forward
- Reversionary bonusarrow_forward
- Actuarial valuation and surplus distributionarrow_forward
- Final Accountsarrow_forward
Full-length IC-26 practice, timed to 2 hours and scored.