Bonus in Life Insurance Policy
In the simplest of words, a bonus is an extra amount or reward you receive over and above your base salary/ amount. A similar concept aligns with life insurance companies, which make bonus payments to their policyholders yearly beyond the basic sum they are entitled to. This additional amount can be either paid out on policy maturity or upon the death of the insured, based on your policy terms.
How is Life Insurance Bonus generated?
The premiums paid by policyholders of a life insurance company become a part of its asset pool that is utilized for payment of claims in the future. A large portion of these funds is majorly invested in debt instruments secured by the government.
The insurer’s claim experience and returns on investment together are responsible for profit, which it distributes as bonus payments at the end of the financial year. Any excess assets after the company’s assets and liabilities are valued may also generate an extra amount to be distributed as a bonus.
Types of bonuses:
Reversionary Bonus: The insurance company generates a return on the policyholder’s funds and decides to allocate a certain portion of the return to the policyholders in the pool is called a reversionary bonus.
Some of the common features of a bonus are:
Bonus rates are declared depending on the investment experience of the company.
Once a bonus is allocated to a policy, it is almost always guaranteed to be paid out.
Once allocated, the amount so allocated is called a vested bonus.
Vested bonuses are of 2 types:
Simple Reversionary:
The amount of bonus allocated is always a percentage of the original maturity Sum Assured.
Compound Reversionary:
A few policies may also offer this bonus. In this case, the amount of bonus allocated to a policy is added to the maturity Sum Assured and a bonus is calculated as a percentage of the maturity Sum Assured and any bonus already vested.
Reversionary Bonuses are usually paid out at the end of the policy term.
Interim Bonus:
Usually, bonus declaration is to be done by the end of a financial year, however, in cases where the death of the insured or policy maturity happens before that, the life insurance company declares an interim bonus. This is because while the policy might have accrued a bonus from the last financial year, the maturity or claim date falls between two bonus declaration dates. Hence there may be a short duration for which the policy may miss out on the bonus. To ensure that the policyholder or their beneficiaries are not at a disadvantage, a bonus is added on a pro-rata basis as per interim bonus rates announced by the insurer.
Terminal Bonus:
A one-time bonus, also called a persistency bonus, is paid by India's best life insurance policy to the policyholder for running the policy for a determined period at the insurer’s discretion. It is paid only when the policy matures or upon the death of the insured. Policies that have been surrendered or acquired paid-up value are excluded. This bonus depends on the policy's performance over the years and is subject to the insurer declaring it to benefit policyholders.
How is Life Insurance Bonus calculated?
Bonus is either computed as a percentage of the sum assured or as a certain amount per ₹1000 of the sum assured. For example, if the bonus is ₹ 50 per ₹1000 for a policy with a sum assured of ₹ 1 lakh, the annual bonus will be ₹ 5000. For a policy term of 10 years, the simple reversionary bonus comes out to be ₹ 50,000. The bonus rate is dependent on several factors such as return on company assets, bonuses declared in the previous year, claims filed, expected interest rates in the future, and several other estimates.
Conclusion:
It is important to note that a bonus is paid only to policyholders of a participating life insurance policy. This applies to traditional plans such as endowment or money-back plans. However, read the policy documents carefully when buying a life insurance plan and confirm the benefits the insurer offers, including the bonus, if any.
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