Types Of Bonuses In Life Insurance

Types of Bonuses under Life Insurance

 

Before describing the various types of bonuses, such as the terminal bonus in life insurance, an interim bonus, cash bonuses, and so on, let us first understand how a bonus may work in the context of life insurance.

Firstly, one should know that bonuses are paid under a participating life insurance policy. The difference between a non-participating policy and a participating policy is that, in the latter, the policy may accrue bonuses based on the profits earned by the insurance company. The term ‘participating life insurance policy’ indicates that the policyholder may participate in the profits of the insurance company, as defined and limited by the policy wordings^[1].

Details regarding the participating element of the life insurance policy may be found in the policy documents, which the buyer can benefit by reading thoroughly.

Here are the types of bonuses in life insurance you should know about:

• Simple Reversionary Bonus ^[1]

This bonus is calculated after taking a certain percentage of the sum assured into consideration. The simple reversionary bonus is usually declared on an annual basis and may be added to the current value of the policy. However, the bonus may be paid out only during the maturity of the policy or when the policyholder passes away, minus the standard deductions mentioned under the policy.

Let’s look at the following illustration to understand this better:

Mr Arjun has a participating life insurance policy with a sum assured of Rs 75 lakhs. As per his policy, he receives a simple reversionary bonus at the rate of 3% per year. Thus, every year, a bonus of Rs 22,500 will be accrued under his policy.

^*Figures are for illustrative purposes only

• Compound Reversionary Bonus ^[1]

When the previous year’s bonus is added to the sum assured, the value increases by a considerable level. When the next year’s bonus may be calculated on this consolidated amount, it is then referred to as the compound reversionary bonus.

Thus, this is one of the types of bonuses in life insurance that is accrued not only on the basis of the sum assured value but also on the previous bonuses added to the sum assured amount. The compound reversionary bonus, too, may be accrued through the policy duration and paid during policy maturity or during a death benefit claim, minus the policy standard deductions.

For example, suppose the bonus declared in year 1 is 5 % and Rs. 1 lakh is the guaranteed amount on which the bonus is applicable. The bonus amount will thus be Rs. 5000. Now in the 2nd year, if the same 5% is declared as bonus by the Insurance Company, the bonus amount now will be calculated on sum assured plus previously declared bonus as i.e 5% of 105000. 1 lakh plus 5000 from the previous year. So, in the 2nd year, the bonus amount accrued would be Rs. 5250.

^*Figures are for illustrative purposes only

• Terminal Bonus ^[1]

The one-time terminal bonus in life insurance is paid out when the policyholder completes a pre-determined policy term or when a death claim is raised. It may also be referred to as the persistency bonus and may be rewarded at the discretion of the insurer.

• Cash Bonus ^[1]

Unlike the previously mentioned types of life insurance bonuses, a cash bonus may be paid out to the policyholder year-on-year, minus the standard deductions, rather than accumulated till maturity.

For instance, if the annual premium of your life insurance is Rs 30,000 and the cash bonus rate declared is 5%, then you may receive Rs 1500 as the cash bonus for the year.

^*Figures are for illustrative purposes only

• Interim Bonus ^[1]

In case there is a claim towards death or maturity benefit in midst of a year, that is, between two bonus declaration dates, the insurer pays the interim bonus on a pro-rata basis to the policyholder. The interim bonus is computed basis the interim bonus rates declared by the insurance company, for the short period in between the bonus declaration date and the maturity/claim date for which the policy has not received bonus.

For example, Mr. Rajesh’s life insurance policy is maturing in Dec’2023. He would have earned his last bonus at the end of the financial year 2022-23. However, what about the bonus for the interim period between April,2023 to December,2023. In such a scenario, if a claim is raised between two bonus declaration dates, the insurer will compute an interim bonus for the period from April,2023 to December,2023.

 

How Are Bonuses Calculated under Life Insurance?

Participating policies have a savings element attached to them. Thus, the premiums you pay and the sum assured under the plan, may help you accumulate wealth via the different types of bonuses in life insurance.

However, the calculation of the bonus may depend on multiple factors like the returns on underlying assets, previous bonuses declared, and so on. These factors may depend on the terms and conditions of the participating policy and the insurer¹.

One may have a clear conversation with their insurer’s representative or life insurance agent and get a clear understanding of these factors and bonus rates before signing the proposal form of a participating life insurance policy. Furthermore, it may be vital that you pay the premiums on time and keep your policy active consistently. This may help you stay eligible for different bonuses, whether it may be the terminal bonus in life insurance or reversionary bonuses.

Along with paying premiums on time, the policyholder should also be aware of the other terms and conditions that may need to be met to be eligible for the bonuses.

 

FAQs

 

1. Does the premium increase if a bonus has been declared the previous year?

Your premium is unlikely to be affected by the bonuses declared by the insurance company. Other factors, such as an increase in age, change in lifestyle and health issues, may have an impact on the premium. One can use the life insurance premium calculator to get an estimate of their premium amount based on different factors.

 

2. Are bonuses declared every year?

Whether bonuses are declared every year or not may depend on multiple factors like type of plan, insurance company’s performance, market performance, etc. It may prove to be helpful to consider the consistency of bonuses and the rate of bonuses when choosing an insurance company or policy. One should also keep in mind that past performance in terms of bonuses declared by life insurance companies may not be indicative of future bonus declaration.

 

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