How should you utilise bonus of your participating insurance policy?

In the insurance industry, a participating life insurance policy is also called a par policy. It provides an assured sum at maturity along with insurance cover. In addition, a portion of the profit earned by the insurance policy every year is also given to the policyholder. This amount is given as a bonus or dividend, which is paid on an annual basis. This way, the policyholder also becomes a partner in the profits of the insurance company. That’s why such a policy is called a participating policy. In this policy, both guaranteed and non-guaranteed benefits are given to the policyholder. It is given in the form of bonus and dividend distribution. Non-participating policies generally provide only guaranteed benefits. The policyholder does not receive any profit or dividend.

How can you benefit from the bonus?

The main advantage of a participating policy is that it provides guaranteed insurance protection along with returns in the form of bonuses. This can help achieve financial goals you have set for your children.  According to the website of Aditya Birla Sun Life Insurance, the insurance company gives several options to the policyholders. In the first option, you can get credit of bonus every year in your bank account. If your goal is to accumulate money in the long term then you can reinvest the amount of bonus back in the policy. It will get added to the sum assured.

Provision of tax?

If your policy’s annual premium is not more than 10% of the sum assured, then the bonus and the amount received at the time of maturity will be tax-free under section 10(10D) of the Income Tax Act. If you choose to take a bonus every year, this amount will also be tax-free. Note that if the annual premium of a life insurance policy purchased after April 1, 2023, is more than five lakh rupees, the income from it will not be tax-free.

What do experts say?

Personal finance expert Jitendra Solanki says that participating life insurance policies are basically endowment plans. Insurance companies sell these policies by highlighting features like insurance cover, sum assured along with a bonus. Overall, these policies come with a lot of costs. This results in a net return on investment of not more than 6% annually, which is not effective in beating inflation. In such a case, this option is not good for investment. If you are investing in a participating insurance policy, choose a long-term option. You should choose to accumulate the bonus or dividend in the policy. This will make it easier for you to achieve your goal.