In simplest of words, 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.
How is Life Insurance Bonus generated?
The premiums paid by policyholders of a life insurance company become a part of its asset pool that is utilised for 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 together are responsible for profit, which it distributes as bonus payments at the end of the financial year. Any excess of assets after the company’s assets and liabilities are valued, may also generate an extra amount to be distributed as bonus.
Here are a few types of bonuses paid out to insurers:
Simple Reversionary Bonus: Calculated on the sum assured, this 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. This is because it is calculated as a percentage of the sum assured and all bonuses accrued earlier. The calculation is based on compound interest. However, since it is reversionary in nature, bonus is payable upon maturity or death of the policyholder as above.
Interim Bonus: Usually, 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. This is because while the policy might have accrued a bonus from the last financial year, the maturity or claim date falls between two bonus declaration dates. Hence there may be a short duration for which the policy may miss out on the bonus. To ensure that the policyholder or their beneficiaries are not at a disadvantage, a bonus is added on a pro rata basis as per interim bonus rates announced by the insurer.
Cash Bonus: An insurance company might decide to dole out the yearly bonus accrued in cash to its policyholders when the year ends. Also known as cash bonus, it is calculated as a percentage of the annual premium and gives the insured an advantage in terms of receiving the bonus in hand as cash year on year unlike accruing it till maturity.
Terminal Bonus: A one-time bonus also referred to as 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. It is paid only when the policy matures or upon the death of the insured. Policies which have been surrendered or acquire paid-up value are excluded. This bonus is dependent on the performance of the policy over the years and is subject to the insurer declaring it, in order to benefit policyholders.
How is Life Insurance Bonus calculated?
Bonus is either computed as a percentage of sum assured or as a certain amount per ₹1000 of sum assured. For example, if the bonus is ₹ 50 per ₹1000 for a policy with a sum assured of ₹ 1 lakh, the annual bonus will be ₹ 5000. For a policy term of 10 years, the simple reversionary bonus comes out to be ₹ 50,000. The bonus rate is dependent on several factors such as return on company assets, bonuses declared in the previous year, claims filed, expected interest rates in the future and several other estimates.
It is important to note that bonus is paid only to policyholders of a participating life insurance policy. This applies to traditional plans such as endowment or money back plans. However, even such policies may sometimes forego the bonus to offer guaranteed addition to the insured, disclosed clearly upon purchase. Read the policy documents carefully when buying a life insurance plan and confirm the benefits offered by the insurer including the bonus, if any.
iSelect Star term plan from Canara HSBC Oriental Bank of Commerce 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 cover by opting for inbuilt coverage for accidental death, permanent disability and child support among others. So make the right choice in tune with your needs and provide your family the security of a better future by choosing the right insurance policy.