What is Terminal Bonus in Life Insurance and Why It Matters?

2025-06-05

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Life insurance policies are primarily taken to secure the financial future of your loved ones. While most policyholders are aware of the basic sum assured and maturity benefits, fewer know about the additional bonuses that may come their way. One such valuable addition is the terminal bonus in insurance. It can considerably enhance your final payout and make a significant difference in your policy's value.

If you are planning to invest in a life insurance policy, understanding this bonus can help you make informed financial decisions. This blog will further explain what a terminal bonus is, how it works in a life insurance policy, the conditions under which it is paid, and why it's essential to factor it in when choosing a policy.

Key Takeaways

A terminal bonus is an additional payout in a life insurance policy, awarded at maturity or upon the policyholder’s death.
It is usually paid only once and only at the end of the policy term.
It depends on the insurance company’s performance and is not guaranteed, unlike regular bonuses.
Terminal bonuses can enhance the overall value of your life insurance policy, providing extra financial benefits.
Policyholders should review policy terms to understand eligibility and the calculation of terminal bonuses.

What is a Terminal Bonus in Insurance?

A terminal bonus, also known as a final bonus, is an additional sum paid out by life insurance companies. It is offered along with the maturity benefit or death benefit of a participating life insurance policy. This bonus is not declared annually like the reversionary or regular bonus. Instead, it is declared at the end of the policy term and paid just once.

Essentially, the terminal bonus is a performance-linked reward. It is based on your long-term commitment to the policy and the insurer’s earnings over time. The amount can vary significantly, ranging from a small sum to a substantial addition, depending on factors like the policy term, premium amount, and the insurer’s investment strategy.

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How Does it Work in a Life Insurance Policy?

When you invest in a participating life insurance policy, you become eligible to share in the profits of the insurance company’s participating fund. Over the years, your policy may accumulate reversionary bonuses. The terminal bonus, if applicable, is added only at the final stage, either upon maturity or in the event of the policyholder’s death.

Let us understand this with an example:

Suppose you have a participating life insurance policy with a sum assured of ₹10,00,000. Over the years, you accumulate ₹3,00,000 in reversionary bonuses. At maturity, based on fund performance and insurer discretion, you also receive a terminal bonus of ₹2,00,000. Your total maturity payout now becomes:

₹10,00,000 (sum assured) + ₹3,00,000 (reversionary bonus) + ₹2,00,000 (terminal bonus) = ₹15,00,000

In this case, the additional ₹2,00,000 is the terminal bonus, which rewards policyholders who stay invested for the full term.

Eligibility for Terminal Bonus

Not all policyholders are eligible to receive a terminal bonus. The key conditions usually include:

The policy must be a participating life insurance policy.
The policyholder must have completed the full term (for maturity payout), or the policy must be in force at the time of death.
The policy must meet the minimum term requirement, typically 10 years or more.
The policyholder must have paid all premiums in full and on time.

It is worth noting that since the terminal bonus is not guaranteed, the actual amount may vary or may not be paid at all if the participating fund’s performance is not strong.

Did You Know?

The IRDAI requires separate financial statements for participating and non-participating policies.

Source: IRDAI

Factors Affecting Terminal Bonus Amount

Several elements influence the amount of terminal bonus declared by a life insurance provider:

Performance of Participating Fund: If the insurer earns high returns from investments, a higher terminal bonus may be declared
Policy Tenure: Longer-term policies are generally rewarded with higher terminal bonuses
Sum Assured: Higher coverage may also translate to a proportionally higher terminal bonus
Company Profitability: The insurer’s overall profit plays a role in determining bonus declarations

Since the terminal bonus is not guaranteed, it should be treated as an additional benefit rather than a core part of your policy planning.

Terminal Bonus vs. Reversionary Bonus

A reversionary bonus is an annual bonus added to a participating life insurance policy by the insurer. Once declared, it becomes guaranteed and forms part of the sum payable at maturity or on death, even if declared years earlier. It is important not to confuse the terminal bonus with the reversionary bonus. Here’s a quick comparison:

Feature	Reversionary Bonus	Terminal Bonus
Frequency	Declared annually	Declared once
When paid	At maturity/death	Only at maturity/death
Guarantee	Once declared, it’s locked	Not guaranteed
Linked to fund performance	Partially	Strongly

This table highlights that while both are benefits under participating policies, the terminal bonus depends much more on the overall performance of the policy fund.

Is Terminal Bonus Taxable?

Generally, the payout received from a life insurance policy, including bonuses, is tax-free under Section 10(10D) of the Income Tax Act, 1961, provided the premium paid does not exceed 10% of the sum assured. However, you must consult a tax advisor or financial expert to confirm the tax treatment of your specific policy and payout.

Why Choose a Policy with Terminal Bonus?

Opting for a life insurance policy with a terminal bonus provides a blend of protection and wealth creation. These policies are ideal for individuals seeking long-term financial security with the potential for additional returns. For example, the Promise4Future plan by Canara HSBC Life Insurance offers customisation, allowing policyholders to tailor coverage and benefit from potential terminal bonuses, making it a versatile choice for diverse financial needs.

Risks and Considerations

While terminal bonuses are attractive, they come with the following limitations:

Non-Guaranteed: Terminal bonuses depend on the insurer’s performance, so there is no assurance of receiving one.
Market Dependency: Economic downturns can reduce the surplus, impacting bonus declarations.
Policy Terms: Not all policies offer terminal bonuses; only participating plans qualify.

Policyholders should carefully review the terms and conditions of their life insurance policy to confirm eligibility for terminal bonuses and understand the factors that may affect them.

Conclusion

A terminal bonus in insurance is a significant incentive for policyholders who stay invested for the full policy term. While it is not guaranteed, it has the potential to significantly increase your final payout, rewarding your loyalty and the insurer's good fund management.

If you are planning to buy a life insurance policy, consider one that participates in the insurer’s profits and offers the possibility of receiving a terminal bonus. Canara HSBC Life Insurance provides a range of participating policies that are designed to offer long-term benefits, including bonuses.

So, if you are investing for protection, savings, or both, keep an eye on terminal bonuses. They could add that extra edge to your financial planning.

Glossary

Terminal Bonus: A one-time additional bonus paid at the end of a participating life insurance policy, subject to performance and conditions
Participating Policy: A life insurance policy that shares in the insurer’s profits through declared bonuses
Reversionary Bonus: Annual bonus added to a participating policy, once declared, becomes guaranteed and payable at maturity or death
Sum Assured: The fixed amount promised by the insurer, paid to the nominee upon death or to the policyholder at maturity
Maturity Benefit: The total payout received by the policyholder at the end of the policy term, including bonuses (if any)

FAQs

No, only participating life insurance policies may offer a terminal bonus. It’s important to check with your insurer whether your chosen plan includes this benefit.

No, it is not guaranteed. The insurer may declare it based on the performance of the participating fund and other factors, like profitability.

The terminal bonus is paid only once, either at policy maturity if the policyholder survives the term, or upon death if it occurs before maturity.

There is no fixed formula. It is declared at the insurer's discretion, usually based on fund performance, policy duration, and sum assured.

In most cases, terminal bonuses are part of the policy proceeds and are tax-free under Section 10(10D) of the Income Tax Act, provided certain conditions are met.

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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