My agent showed me a benefit illustration projecting ₹48 lakh at maturity. Is that guaranteed?

No. IRDAI mandates that benefit illustrations show two projected values, at 4% and 8% gross assumed annual returns. The ₹48 lakh figure is almost certainly the 8% scenario; the 4% scenario will be materially lower. Neither is a guarantee — both are projections that depend on the participating fund's future performance and the bonuses the insurer actually declares. Ask to see both figures side by side and base your decision on the lower 4% illustration.

I have two par policies issued in FY 2024-25 with premiums of ₹2.8 lakh and ₹2.5 lakh. Will the maturity be taxable?

Yes. Both were issued on or after 1 April 2023 and the aggregate annual premium of ₹5.3 lakh exceeds the ₹5 lakh threshold introduced by the Finance Act 2023. Maturity proceeds from both policies are taxable. The taxable amount is the net gain — maturity proceeds minus total premiums paid over the term — taxed as income from other sources at your applicable slab rate in the year of receipt.

Conceptual · Article 7.1.14

Participating Savings Plans.

What "With-Profits" Really Means — and What It Really Pays.

Published as on 22 July 2026

A Participating — or "par", or "with-profits" — plan is a traditional life insurance policy that bundles life cover with a savings pot, and shares a slice of the insurer's participating-fund surplus with policyholders as bonuses. At maturity or death you receive the sum assured plus the bonuses accumulated over the years. The catch sits in one word: the bonuses are not guaranteed. They are declared each year at the insurer's discretion, depend on how the participating fund performs, and only vest and pay out at maturity, death or surrender. Only the base sum assured is contractually promised. Effective returns typically land around ~4.5–6% over a 20-year term — a floor with modest upside, not a wealth engine — while the IRDAI-mandated 4% and 8% illustrations shown at the point of sale routinely make the product look far better than it delivers.

Cover + Bonus

Structure

~4.5–6%

Effective IRR

Non-Guaranteed

Bonuses

₹5 Lakh

10(10D) Threshold

Executive Summary · Page 2

Executive Summary · 6 Findings

A participating plan answers a simple wish: a life cover that also "gives something back" at the end. It does — but the "something" is a set of non-guaranteed bonuses declared year by year out of the insurer's participating fund, and the guaranteed part is only the base sum assured. The product bundles two jobs — protection and saving — and does neither as well as buying them separately. Its honest role is a conservative floor for a very risk-averse saver, not a growth asset.

Covers what "participating" means and how the segregated par fund shares surplus; the product forms (endowment, money-back, whole life); the four bonus types and why none is guaranteed until vested; how the IRDAI 4%/8% benefit illustrations mislead; guaranteed surrender value, the IRDAI 2024 asset-share reforms and the cost of early exit; par versus non-par versus ULIP; the ~4.5–6% effective-return problem and "buy term, invest the rest"; and Section 80C, Section 10(10D) and the Finance Act 2023 ₹5 lakh threshold.

Key Findings

"Participating" means you share the insurer's surplus.

A par (with-profits) policy shares a portion of the insurer's participating-fund surplus with policyholders as bonuses declared each year. A non-participating policy shares nothing — it pays only the guaranteed benefits in the contract. IRDAI requires the par fund to be kept strictly segregated from non-par business and shareholders' funds, with a prescribed substantial share of distributable surplus allocated to policyholders.

Three product forms, one surplus structure.

Endowment plans pay the sum assured plus accumulated bonuses at maturity or on earlier death — the most common form. Money-back plans add periodic survival benefits during the term. Whole life plans cover the policyholder up to age 99 or 100 with bonuses accruing throughout, payable on death. All three share the same participating surplus mechanism; only the timing of cash flows differs.

Four kinds of bonus — reversionary, terminal, interim.

A simple reversionary bonus is a fixed percentage of the sum assured added each year; a compound reversionary bonus is a percentage of the sum assured plus all previously accrued bonuses, so it compounds. A terminal (final) bonus is a one-time discretionary reward paid only at maturity or death. An interim bonus covers claims falling between two annual declaration dates. Rates vary by insurer and by year.

Bonuses are not guaranteed — and illustrations mislead.

Once declared and vested a reversionary bonus cannot be withdrawn, but future rates are set annually and can fall if the fund underperforms. IRDAI mandates that benefit illustrations show two assumed returns — 4% and 8% gross — and neither is a guarantee. Point-of-sale pitches lean on the flattering 8% figure. Always ask for both and decide on the conservative 4% illustration.

A long lock-in — early exit destroys value.

Par plans carry a guaranteed surrender value and, since the IRDAI (Insurance Products) Regulations, 2024, an asset-share-based Special Surrender Value payable after one completed policy year. The insurer pays the higher of the two. Even so, exiting in years 2–5 typically recovers only 60–70% of premiums paid, because first-year acquisition costs and commissions of 25–35% are front-loaded. Returns are heavily back-loaded to the full term.

~4.5–6% returns — and a ₹5 lakh tax trap.

Over a 20-year hold, effective returns typically sit around 4–5.5%, well below PPF (~7.1%) or long-run equity. Premiums qualify for Section 80C (old regime, subject to the 10%-of-sum-assured rule); death benefits are always exempt under Section 10(10D). But for policies issued on or after 1 April 2023, maturity proceeds are tax-free only if aggregate annual premium across traditional policies stays within ₹5 lakh.

At A Glance

Feature	Value	Detail
Structure	Cover + savings	Traditional
Bonuses	Non-guaranteed	Declared yearly
Guaranteed part	Sum assured	Base floor only
Effective IRR	~4.5–6%	Over 20 yrs
Illustration	4% & 8%	IRDAI-mandated
Surrender	GSV / SSV	Higher of two
Tax	₹5L threshold	10(10D) limit
Best use	Very conservative	Not wealth growth

Exhibit 01: 20-Year Returns vs Alternatives

Instrument	Return (p.a.)	Note
Par plan	~4–5.5%	Non-guaranteed
PPF	~7.1%	Sovereign, EEE
NPS equity	9–11%	Market-linked
Term + index	Higher corpus	Buy term, invest rest

Indicative, based on historical bonus experience from major Indian insurers; par returns are not guaranteed. PPF ~7.1% is subject to quarterly revision; NPS and index returns are market-linked and can vary widely. The premium difference between a par endowment and a pure term plan, invested over the same period, typically builds a larger corpus than the par plan's maturity benefit.

The Opening · Page 3

The Opening

A participating plan is sold on a comforting idea: a life cover that quietly grows and hands something back at the end. The mechanism behind that promise is genuine but often misunderstood. The insurer pools par-policy premiums into a segregated participating fund, invests it conservatively, and each year distributes a prescribed portion of the fund's surplus to policyholders as bonuses. What is guaranteed in the contract is only the base sum assured; the bonuses that make the "savings" appealing are declared at the insurer's discretion and can rise or fall with the fund's fortunes.

"A par plan guarantees the sum assured and little else. Everything that makes the maturity value attractive — the bonuses — is declared year by year, out of a fund whose future performance no one can promise. The illustration is a projection, not a payout."
Guaranteed vs Non-Guaranteed

The mechanics. Reversionary bonuses are added annually and, once vested, become a locked-in addition to the policy — but they are only paid out at maturity, death or surrender, never in cash along the way. A terminal bonus, if any, is a one-time discretionary top-up at the end. So the policyholder waits the full term to collect, and the final number depends on a whole sequence of yearly declarations, not the single rate shown on the sales illustration.

The FY 2025-26 context. IRDAI requires every benefit illustration to project maturity values at two assumed gross returns — 4% and 8% per annum. These are scenarios, not guarantees, and the actual outcome can sit below either. The Finance Act 2023 also reshaped the tax picture: for traditional policies issued on or after 1 April 2023, maturity proceeds lose their Section 10(10D) exemption once aggregate annual premium crosses ₹5 lakh.

The Honest Boundary: A par plan is NOT a high-return investment — ~4.5–6% is the realistic long-run band. It is NOT a substitute for adequate life cover — the same rupee buys a far larger term sum assured. Its bonuses are NOT guaranteed until vested, and its illustrations are NOT promises. It CAN serve a genuinely conservative saver who values a guaranteed floor, enforced discipline and zero market volatility — and who understands they are paying for that comfort in foregone returns.

Structure

Part I

What "Participating" Means, the Product Forms & the Four Bonuses

Part II

Why Bonuses Aren't Guaranteed, the 4%/8% Trap & Surrender Value

Part III

Effective Returns, Par vs Non-Par vs ULIP & Tax

Part IV

The Verdict: A Conservative Floor, Used Honestly

Use If

✓ You need a guaranteed minimum floor at a fixed future date

✓ You cannot tolerate any market volatility

✓ You value enforced savings discipline

✓ Long-term estate or legacy planning

Do NOT Use If

✕ You want to maximise long-term returns

✕ You may exit before maturity

✕ Aggregate premium exceeds ₹5 lakh

✕ You need genuine, adequate life cover

Part I

What "Participating" Means, the Product Forms, and How the Four Bonuses Work

How the segregated participating fund shares its surplus with policyholders; the endowment, money-back and whole life forms the structure takes; and the four bonus types — simple and compound reversionary, terminal and interim — that turn declared surplus into a policy's eventual payout.

Part I · Page 4

The Three Product Forms

Form	Payout	Note
Endowment	SA + bonuses at maturity	Most common
Money-back	Periodic + maturity	Survival benefits
Whole life	On death only	Up to age 99/100

An endowment pays the sum assured plus accumulated reversionary bonuses and any terminal bonus at maturity, or the death benefit if the insured dies during the term. A money-back plan pays lump-sum survival benefits at set intervals — say 20% of the sum assured at the end of years 5, 10 and 15 — with the balance and bonuses at maturity; survival benefits already paid are deducted from the final death benefit. A whole life plan covers the policyholder for life, with the sum assured and bonuses payable on death.

What "Participating" Means

A Segregated Surplus, Shared

IRDAI requires the insurer to keep a segregated participating fund, separate from non-par business and shareholders' funds. A prescribed substantial portion of the fund's distributable surplus must be allocated to policyholders as bonuses each year; the balance is retained as shareholders' profit. "With-profits" simply means the policyholder participates, as a passive beneficiary, in that fund's performance alongside the guaranteed cover.

The Four Bonus Types

Bonus	Basis	When Paid
Simple reversionary	% of SA	At exit
Compound reversionary	% of SA + accrued	At exit
Terminal (final)	Discretionary	Maturity / death
Interim	Pro-rata	Between declarations

A simple reversionary bonus adds a fixed rupee amount each year based only on the sum assured. A compound reversionary bonus is calculated on the sum assured plus all previously accrued bonuses, so it earns "bonus on bonus". A terminal bonus is a one-time discretionary reward for long persistence, never guaranteed at inception. An interim bonus keeps a claim falling between two declaration dates from being disadvantaged by timing.

Worked example (indicative): On a ₹10 lakh sum assured, a 4% simple reversionary bonus adds ₹40,000 every year — about ₹8 lakh over 20 years. A 3.5% compound reversionary bonus starts at ₹35,000 in year 1 and, growing on the accrued base, reaches roughly ₹9.9 lakh over the same 20 years — more than the simple version at a lower nominal rate, purely from compounding. Rates are assumed for illustration and are not guaranteed.

Part II

Why the Bonuses Aren't Guaranteed, How the 4%/8% Illustration Misleads, and What Surrender Really Returns

Reversionary bonuses vest once declared but future rates float with fund performance; the two IRDAI-mandated illustration scenarios are projections, not promises; and the guaranteed and special surrender values — even after the IRDAI 2024 reforms — still punish an early exit heavily.

Part II · Page 6

The Guarantee, and Its Limits

Vested Bonuses Are Locked — Future Ones Aren't

A reversionary bonus, once declared and vested, becomes a guaranteed addition and cannot be taken back. But the rate is set anew each year, based on the fund's investment returns, mortality experience and expenses. A plan sold in a high-bonus period can see rates decline if performance deteriorates. Only the base sum assured is promised at inception.

The 4% / 8% Illustration Trap

IRDAI mandates benefit illustrations at two assumed gross returns — 4% and 8% per annum. Both are scenarios, not guarantees; the actual outcome can fall below either. Sales conversations lean on the flattering 8% figure. A ₹48 lakh "maturity value" quoted on a ₹2 lakh annual premium is almost always the 8% projection.

Decide on the Lower Number

Always ask to see both illustrations side by side, and base the decision on the conservative 4% scenario. If the plan only makes sense at 8%, it does not make sense. The real, realised effective return has historically clustered in the ~4.5–6% band, closer to the lower illustration.

Surrender Value & Lock-In (FY 2025-26)

GSV vs SSV — Insurer Pays the Higher

The Guaranteed Surrender Value is a minimum set as a percentage of premiums paid — low in early years. The Special Surrender Value reflects the policy's asset share — its proportionate slice of the par fund. The insurer pays whichever is higher. Under the IRDAI (Insurance Products) Regulations, 2024, the SSV is payable after just one completed policy year.

The Cost of Early Exit

First-year acquisition costs and commissions of 25–35% are front-loaded into the policy, so returns are heavily back-loaded to the full term. A 20-year stayer may earn 4–5%; an exit in year 4 may recover only 60–70% of premiums paid. The 2024 reforms improved early surrender values but did not remove the penalty of leaving early.

The Back-Loaded Return Profile

Exit Point	Typical Recovery	Why
Years 2–5	~60–70% of premiums	Front-loaded costs
Mid-term	Near premiums paid	Costs amortising
Full term	~4–5.5% IRR	Bonuses vest & pay

Indicative rule-of-thumb figures for a traditional endowment; check the specific policy's guaranteed surrender value schedule. Actual recovery depends on insurer, product and the asset share at the time of surrender.

Part III

The Effective-Return Problem, Par versus Non-Par versus ULIP, and the Tax Reality

Why a bundled cover-and-savings product underperforms both a pure term plan and a simple investment; how par sits between guaranteed non-par and market-linked ULIPs; and how Section 80C, Section 10(10D) and the Finance Act 2023 ₹5 lakh threshold decide what you actually keep.

Part III · Page 8

The Effective-Return Problem

For ₹10L Cover	Term Plan	Par Endowment
Annual premium	₹3,000–5,000	₹50,000–60,000
What it buys	Pure cover	Cover + savings
Savings return	—	~4–5.5%

Evaluated separately, each job is done poorly. As insurance, a par plan's premium is roughly ten times a term plan's for the same ₹10 lakh cover. As savings, the implicit ₹45,000–55,000 a year earns only ~4–5.5% over 20 years — below PPF's ~7.1%, an NPS equity allocation's expected 9–11%, or a plain index fund.

"Buy Term, Invest the Rest"

Buy a pure term plan for the cover, and invest the premium difference monthly in a diversified instrument. Over the same period this typically builds a corpus substantially larger than the par plan's maturity benefit. The maths holds across policy-design variations.

Why par plans still sell: first-year commissions of 25–35% mean a ₹1 lakh premium par plan pays the agent ₹25,000–35,000, against perhaps ₹1,000–3,000 for a comparable term plan. That incentive, not client need, drives much of the volume. Fee-only, conflict-free advisers earn no distribution commission — so their insurance advice is structurally more likely to fit the client.

Par vs Non-Par vs ULIP

Type	Returns	Risk
Participating	Non-guaranteed bonuses	Low
Non-par	Fixed / guaranteed	Lowest
ULIP	Market-linked	Investor bears

A non-par plan pays only the guaranteed benefits — no surplus sharing, full certainty. A par plan adds non-guaranteed bonus upside on a guaranteed floor. A ULIP passes market returns and risk directly to the policyholder via chosen funds. Par sits in the middle: more upside than non-par, far less volatility — and far less growth — than a ULIP or direct equity.

Tax Treatment (FY 2025-26)

Section 80C & Death Benefit

Premiums qualify for Section 80C within the ₹1.5 lakh ceiling, provided premium does not exceed 10% of the sum assured (policies from April 2012) — old regime only. Death benefits are always fully exempt under Section 10(10D), with no premium threshold.

The ₹5 Lakh Maturity Threshold

For policies issued on or after 1 April 2023, maturity proceeds stay exempt only if aggregate annual premium across all non-ULIP traditional policies is ₹5 lakh or less. Above that, the net gain (proceeds minus premiums, per Rule 11UACA) is taxed as income from other sources at slab rate. Section 194DA deducts 2% TDS on the income portion where proceeds exceed ₹1 lakh in a year.

Part IV

The Verdict

A guaranteed floor for the very cautious. Not a way to build wealth.

Part IV: The Verdict · Page 10

30-Second Summary

A participating savings plan bundles life cover with a savings pot and shares the insurer's participating-fund surplus as bonuses. Only the base sum assured is guaranteed; the bonuses — simple or compound reversionary, plus terminal and interim — are declared annually and vest and pay only at maturity, death or surrender. Effective returns cluster around ~4.5–6% over a full 20-year term. The IRDAI 4% and 8% illustrations are projections, not promises, and the 8% figure flatters the product.

Early exit is costly: front-loaded 25–35% acquisition costs mean a year-4 surrender may recover only 60–70% of premiums, even after the IRDAI 2024 asset-share reforms. Premiums earn Section 80C (old regime); death benefits are always tax-free; but maturity proceeds on post-April 2023 policies lose Section 10(10D) exemption once aggregate premium exceeds ₹5 lakh. For most savers, "buy term, invest the rest" builds more wealth. A par plan earns its place only for a genuinely conservative saver who values the floor above the return.

"A participating plan answers one question honestly — will a guaranteed minimum be there at the end? Yes. It answers another dishonestly at the point of sale — how much will it grow? The 8% illustration is not a forecast, it is a hope. Judge the plan on the 4% number, and on whether you needed protection, savings, or both bought separately for less."
The Final Orientation

The Bottom Line: Treat a par plan as a conservative savings floor, never as your life cover or your growth engine. Insist on both the 4% and 8% illustrations and decide on the lower one. Commit only if you can hold to the full term — early exit forfeits value. Keep aggregate traditional-policy premium within ₹5 lakh to preserve the Section 10(10D) exemption. For adequate protection, buy a pure term plan; for growth, invest the difference. If you are not deeply risk-averse, a par plan is rarely the right tool.

ADWIZR · July 2026

Decision Rules

Use Correctly As

✓ A guaranteed floor for a fixed future goal

✓ Enforced discipline for a poor saver

✓ A zero-volatility conservative allocation

✓ Whole life for estate / legacy transfer

Misuse Destroys Value

✕ As your main life cover

✕ As a growth or wealth-building asset

✕ When you may need to exit early

✕ Above the ₹5 lakh tax threshold

Three Misconceptions

What Buyers Get Wrong

(1) "The bonuses are guaranteed." Only vested reversionary bonuses are locked; future rates and terminal bonuses are not. (2) "It will give me the ₹48 lakh shown." That is the 8% illustration; the realistic outcome is nearer the 4% figure. (3) "It's cover plus a great investment." It is modest cover and a ~4.5–6% saving — both bettered by buying them separately.

vs Non-Par & ULIP

Where Par Sits

Non-par: fully guaranteed, no upside. Par: guaranteed floor plus non-guaranteed bonus upside, low volatility. ULIP: market-linked, investor bears the risk and the growth. Different tools for different appetites — par is the cautious middle.

~4.5–6%

Effective IRR

Over full term

4% / 8%

Illustrations

Judge on the lower

₹5L

10(10D) cap

Post-Apr 2023

Investor FAQ

Questions Indian Investors Ask

Six questions, answered directly.

Investor FAQ · Page 12

Frequently Asked Questions

Q1 My agent showed me a ₹48 lakh maturity projection on a ₹2 lakh/year premium. Is that guaranteed?

No. IRDAI mandates that benefit illustrations show two projected values — at 4% and 8% gross assumed annual returns. The ₹48 lakh figure is almost certainly the 8% scenario; the 4% scenario will be materially lower. Neither is a guarantee — both depend on the participating fund's future performance and the bonuses the insurer actually declares over the next 20 years. Ask to see both figures side by side and base your decision conservatively on the 4% illustration, not the 8% one.

Q2 I have two par policies from FY 2024-25 with premiums of ₹2.8 lakh and ₹2.5 lakh. Will the maturity be taxable?

Yes. Both were issued on or after 1 April 2023 and your aggregate annual premium of ₹5.3 lakh exceeds the ₹5 lakh threshold introduced by the Finance Act 2023, so maturity proceeds from both are taxable. The taxable amount is the net gain — maturity proceeds minus total premiums paid over the term — taxed as income from other sources at your applicable slab rate in the year of receipt. Policies issued before 1 April 2023 are not counted toward the ₹5 lakh aggregate.

Q3 If my par plan maturity becomes taxable, can I deduct the premiums I paid?

Yes. Under Rule 11UACA (notified pursuant to CBDT Circular 15/2023), the taxable income is maturity proceeds received minus aggregate premiums paid during the term — only the net gain is taxed, not the gross proceeds. If you paid ₹20 lakh in premiums over 20 years and received ₹32 lakh at maturity, the taxable income is ₹12 lakh, added to your total income and taxed at your slab rate in the year of receipt. Section 194DA also deducts 2% TDS on the income portion where proceeds exceed ₹1 lakh in a financial year.

Q4 I want to surrender my four-year-old endowment plan. How much will I get?

Surrendering in years 3–5 typically returns meaningfully less than total premiums paid, because high first-year acquisition costs and commissions are front-loaded into the policy. Under the IRDAI (Insurance Products) Regulations, 2024, a Special Surrender Value based on asset share is payable after just one completed policy year, and the insurer pays the higher of the guaranteed and special surrender values. As a rule of thumb, a year-4 surrender on a traditional endowment recovers roughly 50–70% of premiums paid — check your policy's surrender schedule and ask the insurer for a current quotation.

Q5 The bonuses on my par plan have been declared for 15 years. Are they guaranteed now?

Reversionary bonuses that have already been declared and vested are guaranteed additions to your policy and cannot be taken back by the insurer. But future bonus declarations are not guaranteed and depend on the participating fund's ongoing performance. What you hold today is locked in; what you receive in future years depends on how the fund performs and what the insurer declares going forward. Terminal bonuses, in particular, remain entirely at the insurer's discretion until the claim is paid.

Q6 I'm in the 30% bracket. Is a par plan a good tax-saving tool?

Rarely, for new policies. For policies issued before 1 April 2023 (premium within 10% of the sum assured), maturity proceeds remain fully exempt under Section 10(10D). For new policies, the exemption is lost once aggregate annual premium across such plans exceeds ₹5 lakh — so in the 30% bracket you would pay 30% on the net gain at maturity, materially eroding an already modest ~4.5–6% return. A PPF (exempt-exempt-exempt, no premium cap) or NPS is usually a more efficient tax-planning tool, with term insurance handling the protection need separately.

Key Terms & Definitions

Participating (Par) Policy

A traditional life insurance policy that shares a portion of the insurer's participating-fund surplus with policyholders as bonuses declared each year. Also called "with-profits". It pays the guaranteed sum assured plus accumulated bonuses at maturity or on death; a non-participating policy shares no surplus and pays only guaranteed benefits.

Reversionary Bonus

A bonus added to the policy each year and, once vested, locked in as a guaranteed addition — but paid out only at maturity, death or surrender. A simple reversionary bonus is a percentage of the sum assured; a compound reversionary bonus is a percentage of the sum assured plus previously accrued bonuses, so it compounds.

Terminal Bonus

A one-time, discretionary bonus paid at maturity or on death as a reward for long persistence. Unlike reversionary bonuses it is not vested along the way and is never guaranteed at inception; it typically reflects the participating fund's long-term investment performance.

Special Surrender Value (SSV)

A surrender value calculated on the policy's asset share — its proportionate slice of the participating fund at the time of exit. Under the IRDAI (Insurance Products) Regulations, 2024, it is payable after one completed policy year, and the insurer pays the higher of the guaranteed and special surrender values.

Asset Share

The notional accumulated value of a policy's own contribution to the participating fund — premiums paid, plus investment returns, less its share of expenses and cost of cover. It underpins the Special Surrender Value and reflects why early exits, burdened by front-loaded costs, recover so little.

Section 10(10D)

The Income Tax Act provision exempting life insurance proceeds. Death benefits are always exempt. For traditional policies issued on or after 1 April 2023, maturity proceeds are exempt only if aggregate annual premium across such policies is ₹5 lakh or less; above that, the net gain is taxable as income from other sources.