Types of Bonuses Under Life Insurance Policy

Types of Bonuses Under Life Insurance Policy

Life insurance policies provide financial protection to the policyholder’s family and offer additional bonuses to participating policyholders.

Written by : Knowledge Centre Team

2025-12-24

2263 Views

7 minutes read

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A bonus is an extra amount or reward you receive over and above your base salary amount. A similar concept applies to 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 profit-sharing are eligible to receive the yearly bonus amounts. 
  • There are 5 types of bonus in insurance. 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. 

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.

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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 (ULIPs) 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 in Life Insurance

Life insurance policies offer five major types of bonuses to policyholders. Below is a list of the types of bonuses:
 

Bonus TypesDefinition
Simple Reversionary BonusCalculated 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 the death of the policyholder as above.

 

Interim BonusUsually, a bonus declaration is made 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 BonusA 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.
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Did You Know?

The bonus amount payable isn't fixed? fluctuates depending on the investment income earned by the insurance company.
 

Source: Cnbctv18

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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 a percentage of the total amount of the 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 a 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 in insurance, 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 to policies that have been terminated or acquired with paid-up value. 

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 by 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:

  1. Debt Instruments: Financial assets issued by governments or corporations and offer fixed returns
  2. Annual Premium: Yearly payment made by the policyholder to the insurer to maintain coverage under a life insurance policy
  3. Bonus Declaration Frequency: Frequency at which insurance companies announce bonus payouts to policyholders
  4. Financial Performance: It measures an insurance company's profitability and stability based on its revenue, expenses, and investment returns
  5. Unit-linked insurance: It is a plan that combines life cover with market-linked investments, helping you build wealth while staying insured
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Uncertain About Insurance

FAQs

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.

Bonus insurance is not applicable to all policyholders; it depends on participating policies, insurer profits, policy terms, and bonus declaration.

A cash bonus is a declared profit share paid in cash or adjusted against premiums, usually annually or at maturity.

Terminal bonus is paid at maturity or death, while the interim bonus is a bonus declared between two valuation periods.

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.

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