Participating Plans: Capital Protection, Not Inflation-Beating Returns

Bonuses in participating life insurance plans are generally announced once a year, reflecting the insurer’s profits and how its investments have performed. These payouts can offer policyholders a degree of reassurance, though the returns usually hover between four and six per cent annually. Over the long run, they may edge past inflation, but not by a wide margin.

Inflation in India has historically averaged around five per cent to six per cent, which means real returns from these policies are minimal.

Participating Plans Focus On Preservation, Not Growth

“These plans prioritise capital preservation and disciplined savings rather than aggressive wealth creation. Hence, while they can help preserve purchasing power over time, they are not ideally suited for investors seeking substantial inflation-adjusted growth,” says Gautam B. Boda, group vice chairman, J.B. Boda Group, an insurance broker.

Real-world returns from participating life insurance plans are generally lower than both equity and long-term debt mutual funds. While these policies offer four per cent to six per cent annualised returns, equity mutual funds—despite their market-linked volatility—have historically delivered 10 per cent to 12 per cent over a 10-plus-year horizon. Debt funds, too, depending on duration and credit exposure, have returned six per cent to eight per cent.

“Participating policies offer the benefit of life cover and guaranteed elements, but for investors primarily focused on wealth creation, mutual funds provide superior long-term growth potential and liquidity. These insurance products are better viewed as conservative tools for risk-averse individuals rather than return-maximising investments,” says Boda.

Agrees Amit Suri, CFP and Founder, AUM Wealth, “In short, participating policies offer stability and discipline, but significantly trail the long-term compounding potential of equity mutual funds.”

Participating Policies Suit Conservative Investors Seeking Capital Protection

Participating policies can still play a role in portfolios, particularly for objectives centred on capital protection, disciplined savings, and life cover. “In the present context, with moderate interest rates and equity markets continuing to offer robust long-term growth potential, these plans are more suitable for conservative investors seeking predictable maturity values rather than maximum returns,” says Suri.

Younger investors, and those who are comfortable handling their finances, often find that combining term insurance for protection with mutual funds for growth works better for building wealth and outpacing inflation. Participating plans can still be useful, but they’re usually best kept as just one element within a wider, well-balanced investment mix, rather than the only route to long-term gains.