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The best life insurance policy ensures your family's financial security by giving a predetermined amount to the nominee if the insured passes away unexpectedly. Insurers offer optional rider benefits to enhance policy benefits, including additional bonus amounts, which are extra payments beyond the predetermined sum assured. These bonuses depend on the specific policies held by customers.
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A bonus in life insurance is the extra sum of money that the insurance company may give you if you have a certain type of policy, called a Participating Policy. This bonus is like a reward or benefit that you receive based on the insurance company's profits.
When you buy a participating policy, and pay premiums for your policy, it is used by the insurance company to invest and create wealth. If the company does well and makes profits, they may decide to share some of those profits with you.
The bonus is usually given out once a year, and the amount you receive depends on how well the insurance company has done financially. The company considers things like their investments, the number of policyholders who passed away, and their expenses when calculating the bonus. The bonus can be added to the amount of money your policy is worth, used to get more coverage, or paid to you in cash.
*Note: Non-participating policies don't offer bonuses. They simply provide a fixed amount when the insured dies without any extra benefits.
Term Plans
Insurance companies invest a huge portion of the premiums collected in government-secured debt instruments and a minor portion in equities. The insurer distributes profits to participating policyholders based on the earnings received from these investments. The bonus rate is determined by various factors, such as return on fundamental assets, level of bonus announced in the previous year and other actuarial factors. To become eligible for the bonus, it is mandatory that your policy should be participating or ‘with profits’ type.
The bonus amount is paid upon maturity or death of the policyholder. For example, for a term of 30 years, bonus will be paid only after 30 years. However, if the policyholder dies after the 10th year, the insurer will pay a bonus accumulated until that day to the nominee.
Life insurance companies offer the following types of bonus in insurance:-
Simple Reversionary Bonus
Compound Reversionary Bonus
Cash Bonus
Interim Bonus
Terminal Bonus
Simple Reversionary Bonus: Bonus declarations like this typically occur annually and are immediately added to your policy's value. These bonuses are only paid out when the policy matures or in the event of a policyholder's death.
For instance, if you hold a life insurance policy with a Rs. 10 lakh sum assured and it provides a 5% simple reversionary bonus, you will receive a bonus of Rs. 50,000 each year.
Compound Reversionary Bonus: The calculation is done on the basis of compound interest. The yearly bonus is added to the sum assured and the next year’s bonus is calculated on the new sum assured amount. For instance, Mr. Raj has a participating policy of Rs 10 lakhs and it earned a bonus of 4% throughout the policy tenure which will be Rs 40,000. This amount will be then added to the sum assured, i.e, Rs 10 lakhs in this case, and bonus will be computed on this new sum assured.
Cash Bonus: It is given to the policyholder on a yearly basis and it is computed as a percentage of the yearly premium. For example, if the sum assured is Rs 2 lakhs, cash bonus rate is 4%, and the annual premium is Rs 12,000, then the bonus paid to the policyholder will be Rs 480 (4% of 12,000).
Interim Bonus: It is paid on those policies that mature or are claimed between two bonus announcement dates. While the policy has already accumulated the bonus of the previous year, there is a gap between the bonus declaration date and maturity date of the policy. In such a case, the insurer calculates the bonus on the basis of interim policy rates.
Terminal Bonus: A terminal bonus, often a persistency bonus, is a benefit given to policyholders who keep their coverage until the policy matures. Generally, you won't receive a terminal bonus if you surrender your policy early. Still, certain conditions must be met in some cases for it to be granted on surrender:
The policy is still in force.
All required premiums have been paid.
At least five policy years have been completed.
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
The bonuses covered in a policy are clearly explained in the policy document. At the time of buying a life insurance policy, you should always confirm the benefits with the insurer. It is important that you have a clear understanding of what is being offered to you.
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Below mentioned are a few points that you must keep in mind when you are claiming a life insurance bonus:
Check with your insurance company or read your policy documents to understand the specific details about bonuses, as they can differ from one insurance company to another and depend on the type of policy you have.
Review your insurance policy documents carefully to understand the terms and conditions related to bonus payments.
Pay attention to factors such as the frequency of bonus declarations, how they are calculated, and any specific requirements for eligibility.
Stay informed about when the bonus is declared and how it will be credited or paid out, and what exactly are the steps to claim it.
Calculate your bonus after receiving it to keep a track of the amount received from the life insurance company.
Understand the different ways in which you can utilize the bonus. It can typically be added to the policy's cash value, used to purchase additional coverage, or paid out to you in cash. Consider your financial goals and needs before deciding how to use the bonus.
The bonus you receive may have tax implications, and so it is wise to be aware of the tax implications and any requirements related to the bonus payment.
A bonus in life insurance is like a special reward or an added amount that you can get if you have a participating policy. The extra amount is provided to you by the insurance company based on how well they are doing financially. Therefore, it is one investment that can help you create more wealth and be an added benefit for your future goals.
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
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