Types Of Bonuses In Life Insurance

What is a Bonus in Life Insurance?

A life insurance bonus can be considered as an additional benefit that is added to your insurance policy. This additional benefit is usually paid out upon the death of the life insured or if the plan matures. However, in some cases, when there is the concept of a cash bonus, you can get the bonus additions as regular income from your life insurance plans.

Bonuses are declared typically annually, based on the financial performance and surplus profits of the Insurer and help you create enhanced savings with your life insurance plans. When buying a traditional, savings-oriented life insurance plan, you can check whether the plan offers bonus additions or not and choose a participating policy to get more out of your policy.

Types of Bonuses under Life Insurance

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

• Simple Reversionary Bonus

  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

  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 rate is 5 % every year and Rs. 1 lakh is the guaranteed amount on which the bonus is applicable. Here’s how the policy would earn bonuses -

  Year	Amount on which the bonus is calculated	Bonus earned	Total amount
  1	₹1 lakh	₹5000	₹1,05,000
  2	₹1,05,000	5% of ₹1,05,000 = ₹5250	₹1,10,250
  3	₹1,10,250	5% of ₹1,10,250 = ₹5512	₹1,15,762

  ^*Figures are for illustrative purposes only

  
  

• Terminal Bonus

  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

  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

  In case there is a claim towards death or maturity benefit in the 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 based on 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 a bonus.

  For example, Mr. Rajesh’s life insurance policy is maturing in Dec’2025. He would have earned his last bonus at the end of the financial year 2024-25. However, what about the bonus for the interim period between April 2025 and December 2025? 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 2025 to December 2025.

  
  

Which Policies are Eligible for Life Insurance Bonuses?

While the different types of bonuses in life insurance are useful additions, not all life insurance plans are eligible for the earning bonus. Only participating or with-profit life insurance plans are eligible for the bonus. Traditional savings-oriented life insurance plans are issued as participating plans. These include endowment and money-back plans.

Moreover, you have to pay the due premiums to qualify for the bonus. If the policy is lapsed or in a paid-up state, you would not earn future bonuses even if you have a participating plan. However, bonuses earned when the policy was in force would be paid even for lapsed policies.

How Are Bonuses Calculated under Life Insurance?

Here’s how a bonus is calculated in life insurance plans -

• Premium payment

  Participating policies have a savings element attached to them. When you pay the premium, the insurance company uses the savings part of the premium and invests in specified avenues.

  
  

• Return on investments

  The invested assets generate returns over time. These returns are a type of income for the insurance company. Since the returns are generated from the premiums paid by policyholders, a maximum part of them is paid to the policyholders in the form of a bonus.

  
  

• Bonus declarations

  Depending on the returns earned from assets, insurance companies declare a bonus on eligible participating insurance plans. The bonus is usually declared as a percentage of the sum assured.

  
  

• Bonus addition

  Depending on the sum assured of your policy, the relevant bonus is added.

  
  

Key takeaways

• Participating life insurance plans are eligible for bonus additions as and when a bonus is declared by the insurance company.
• Bonus is a type of additional benefit which can enhance the death or maturity benefit payable under the policy.
• Only participating or with-profits insurance plans whose premiums are paid in full are eligible for bonus additions.
• There are different types of bonus in life insurance, like simple reversionary bonus, compound reversionary bonus, cash bonus, terminal bonus, and interim bonus.
• Bonus is calculated based on the returns that the insurance company earns from the premiums invested in different assets.
• Bonus is not guaranteed and depends on the returns earned by the insurance company.
   

Conclusion

If you want to earn a bonus in your life insurance policy, choose participating endowment or money-back plans. Pay the due premiums to qualify for bonus additions and watch your corpus grow over time. Explore different ways to make the most of your annual bonus and create an optimal corpus for your financial goals.

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, a 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 the type of plan, the 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 declarations.

   
   

3. At what stage is a bonus declared in life insurance?

   A bonus is usually declared every year and paid upon the death or maturity of the policy. However, under cash bonuses, the bonus can be paid as and when they are declared.

   
   

4. How do I check my policy bonus in life insurance?

   You can log into your policy account and check the bonus earned to date. You can check the previous bonuses declared and added to your policy.

   
   

5. What is the difference between a simple and a compound reversionary bonus?

   Under the simple reversionary bonus, the bonus is calculated on the base sum assured of the policy. However, under a compound reversionary bonus, previous bonuses are added to the sum assured, and future bonuses are calculated on the cumulative amount.