Types of Bonuses Under Life Insurance Policy

2025-06-24

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A bonus is an extra amount or reward you receive over and above you base salary amount. A similar concept aligns with life insurance companies, which make bonus payments to their policyholders on a yearly basis beyond the basic sum assured 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.

Key Takeaways

Policyholders are entitled to receive bonus amounts on a yearly basis from their insurance provider.
Not all the insurance policies get the bonus payouts. Only participating policies with the profit-sharing are eligible to receive the yearly bonus amounts.
The bonus amount can be classified into 5 types, namely Simple Reversionary Bonus, Compound Reversionary Bonus, Interim Bonus, Cash Bonus, and Terminal Bonus.
The calculation of the amount for each bonus type varies accordingly and is majorly influenced by the sum insured, the insurer’s surplus profit, and returns on investment.
Go through your policy document to properly understand the bonus payouts and other aspects of your life insurance, as it differs from policy to policy and insurer to insurer.

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How is Life Insurance Bonus Generated?

The premiums paid by policyholders of a life insurance company become a part of its asset pool, which is utilised for the payment of claims in the future. A large portion of these funds is invested in debt instruments secured by the government while allocating little to equities.

The insurer’s claim experience and returns on investment 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 an insurance bonus.

Did You Know?

The bonus amount payable isn't fixed? Instead, it may fluctuate depending on the investment income earned by the insurance company.

Source: Cnbctv18

Which Policies are Eligible for Bonuses?

Only participating (with profit) policies allow policyholders to be eligible to receive the bonus amount. In such policies, the profit earned by the insurance provider is distributed as a bonus payout to the policyholder in the form of reversionary, cash, interim, or terminal bonuses.

Furthermore, policies such as term insurance and unit-linked insurance plans usually do not include profit-sharing, hence exempting them from bonuses in insurance.

Your insurance provider calculates this bonus amount at the end of the financial year based on its performance and surplus profits. This amount varies every year and is majorly influenced by the insurer's surplus profit, your sum insured, claim experience, and investment returns.

Types of Bonuses Paid Out to Insurers

From reversionary bonuses to terminal bonuses in insurance and cash bonuses, there are numerous life insurance bonuses paid out to insurers. Here is the list of types of bonus in insurance you to explore:

Bonus Types	Definition
Simple Reversionary Bonus	Calculated on the Sum assured, a simple reversionary bonus amount is declared annually, even by the best life insurance policy in India, and is accrued to the policy every year till it matures or a claim is filed.
Compound Reversionary Bonus	When the previous year’s bonus adds up to the sum assured and the next year’s bonus is computed on this consolidated amount; it is referred to as compound reversionary bonus. The calculation is based on compound interest. However, since it is reversionary in nature, the bonus is payable upon maturity or death of the policyholder as above.
Interim Bonus	Usually, a 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 in insurance.
Cash Bonus	These are yearly incentives distributed by insurance companies to policyholders at the end of the year. It is calculated as a percentage of the annual premium and provides the insured with immediate cash benefits instead of waiting until maturity.
Terminal Bonus	A one-time bonus, also referred to as a persistency bonus, is paid by the best life insurance policy in India to the policyholder for running the policy for a determined period as per the insurer’s discretion. A terminal bonus is paid only when the policy matures or upon the insured's death.

How are Bonuses Calculated Under Life Insurance?

The calculation of a bonus in insurance varies in accordance with the type of bonus and sum insured.

Here we’ve explained the calculation process for each bonus type under life insurance:

Simple Reversionary Bonuses: These bonuses are calculated as per the percentage of your total sum insured in the policy. Every year, a reversionary bonus rate is standardised, and the bonus amount is calculated as per thousand of the total amount of sum insured.

For example, if your total sum insured is ₹5,00,000 and the standard bonus rate is 2% for the year. You will receive ₹10,000 as the bonus amount in that year.
Compound Reversionary Bonuses: These bonuses are calculated as per the percentage of your total sum insured along with the previous accumulated bonuses, hence the word compound.

Taking our previous example, in the first year of policy tenure, you will receive ₹10,000, which is 2% of ₹5,00,000. In the next year, assuming the standard rate remains at 2%, you will receive ₹10,200, which is 2% of ₹5,10,000 and so on, creating a compounding effect.
Interim Bonus: The interim bonus in insurance is paid in case a policy matures or at the demise of the policyholder. These bonuses are calculated for the number of days between the last bonus declared and when the policy matured or was claimed.
Cash Bonuses: These bonuses are calculated as per the percentage of your annual premium amount or the sum insured in the form of cash.

For example, if you paid ₹20,000 as your annual premium amount and your insurance provider declared a standard cash bonus of 2%, you will receive ₹400 as a cash bonus in that year.
Terminal Bonuses: Terminal bonus, also referred to as final bonus, is calculated on the basis of the long tenure of the policy and is typically declared only when your policy attains maturity. Moreover, this bonus is not applicable for policies that have been terminated or acquired paid-up value.

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Things to Consider While Claiming a Life Insurance Bonus

Now that you know what is bonus in insurance, here are some of the pointers that you must consider when claiming a bonus in life insurance. Keep scrolling through to know the details:

It is essential to check the policy documents in detail to understand the life insurance bonuses, as different companies offer different policies based on the requirements and offerings.

To understand the terms and conditions, you must review the insurance policy documents thoroughly.

You must consider numerous factors like bonus in insurance declaration frequency, how the insurance company calculates, and any specific eligibility criteria requirements.

Ensure you stay informed about details like when the insurance bonus is declared and what steps to take to claim it.

In order to keep track of the amount received from the life insurance policy, you must calculate the bonus in life insurance after receiving it.

The bonus can be used for numerous purposes, like purchasing additional coverage, adding to policy cash value, or more. Thus, you must consider your financial goals before using the bonus.

Also, staying aware of any tax implications or requirements related to the bonus payment will be best.

Wrapping Up!

Thus, a bonus in insurance is a reward for investing in a participating policy. The insurance company offers the extra amount based on the policyholder's financial performance. iSelect Smart360 Term Plan from Canara HSBC Life Insurance is one of the best life insurance policies in India, which offers you the flexibility to choose coverage for your lifetime or a limited period, along with the choice of death benefits and premium payment options.

You can also enhance your coverage by opting for inbuilt cover for accidental death, permanent disability, and child support, among others. So make the right choice, tune with your needs and provide your family the security of a better future by choosing the right insurance policy.

Glossary:

Debt Instruments: These are financial assets such as bonds or loans issued by governments or corporations and offer fixed returns over a specified period.
Annual Premium: The yearly payment made by the policyholder to the insurer to maintain coverage under a life insurance policy.
Bonus Declaration Frequency: It refers to the frequency at which insurance companies announce bonus payouts to policyholders.
Financial Performance: It measures an insurance company's profitability and stability based on its revenue, expenses, and investment returns.

FAQs Related To Bonus in Insurance

The premium usually gets impacted by numerous factors, such as an increase in age, change in lifestyle and habits, and more. The effect of a bonus on the premium amount is unlikely.

The frequency of bonus declarations can vary based on factors such as plan type, company performance, and market conditions. When selecting an insurance provider or policy, it's advisable to assess the consistency and rate of bonuses. However, it's essential to note that past bonus performances by life insurance companies do not necessarily predict future declarations.

Only participating (with-profit) life insurance policies are eligible for bonus payouts. The policyholders with such policies exclusively qualify for bonus distributions. The bonus payable is not fixed and may differ depending on the investment income earned by the insurance company.

To calculate a bonus in a life insurance policy, insurance companies typically use a predetermined formula based on factors such as policy type, duration, and performance. Bonus calculations may involve considerations like the sum assured, premium payments, and investment returns, ultimately determining the bonus amount accrued to the policyholder.

It is calculated as a percentage of yearly premiums.

The bonus amount that the life insurance policyholder receives is tax-free under Section 10(10D) of the Income Tax Act.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.