Tarun Rustagi – Importance of Bonus from Life Insurance Policy?

Vivek Law: Hello and welcome to this special series Finance Made Simple. Joining me today is Tarun Rustagi who is the Chief Financial Officer at Canara HSBC Life Insurance. Thanks very much, Tarun for joining in this conversation. Tarun, when it comes to insurance, there is a bonus element, which kicks in. That paid out usually at maturity. How important is this because many people tend to drop off mid-way through their policy and therefore, don't get this bonus? How according to you is the bonus help in accumulating wealth?

Tarun Rustagi: That's a very good question, Vivek. That's very critical and important from the life insurance perspective. Life insurance products are long-term products and you have to stay invested in this for a long time. The bonus part comes into the picture for participating products. Generally, you classify the products into two categories or three categories - non-participating and participating. The bonus comes under participating and participating products are very unique. They are very powerful insurance products from the customer-centricity perspective. Because what is happening is as per the regulation, whatever profit you are generating from that fund, you have to at least distribute 90% back to the policyholder. So, under this product, the accumulation of money keeps on happening at a fund level. It's a cohort of various policies and if you generate a higher return in that cohort or that fund, then that particular return has to be distributed in a 90:10 ratio. So, 90% will go to the participating policyholder. How you distribute that money over the tenure of the policy is through bonuses. There are various kinds of bonuses, which are prevailing in the market. The most common one is the reversionary bonus, which is accrued every year. It is not paid in cash, it is attached to the policy, and every year, it keeps on accumulating. When the policy matures, you get that money. There is an interim bonus also. Because to take care of people who are exiting in between, in case of deaths, etc. not in terms of surrender. The company declares interim owners so that they don't lose out because they exited in between. The last one is a terminal bonus, which is paid at maturity. If your policy remains enforced till the time of maturity, then this bonus gets added to your fund and you get a lump sum fund. These are very important cash inflows in insurance products or participating products. It means that you are participating in the profit of this particular fund. So, that's how it is unique and very important. Traditionally, these are the most selling products in the insurance market because people can see that there is a significant benefit due to these bonuses being paid. There is one more unique bonus, which is not very popular, that is called Cash Bonus. Every year, just like in trust income, you get cash bonuses but there are very few companies and very few products available in the market because it's very complex. Generally, people tend to keep that money available in the fund for a longer period so that they can earn more. So, that is not a very popular one. That is how in the participating fund, any person who's purchasing a participating product, can accumulate and they can multiply their investment. At the end of the maturity period, they will get that money. And one of the most important aspects is if you surrender the policy, you will not get this bonus. So, it's very important that you keep paying the premium. Continue that policy till the time of maturity and then get the benefit of all these bonuses. Because as soon as you surrender the policy, whatever is accrued will be distributed amongst the rest of the policyholders. You must keep investing or keep continue to pay your premium for all the life insurance policies not only participating policy.

Vivek: Alright, Tarun. We leave it there. Thank you very much for joining us and sharing a very detailed perspective with our viewers. Thank you.

Tarun: Thanks Vivek and thanks viewers.