Types of Bonuses Under a Life Insurance Policy
Bonus refers to an extra amount of money one receives in addition to the base amount. The same concept also holds true with bonuses payable in a life insurance policy. In life insurance, it is an amount which gets accumulated under the policy on a yearly basis and it is payable on the death of the life assured, surrender or at maturity of the plan, whichever occurs earlier. This bonus amount is payable over & above the benefits applicable under a life insurance policy.
Which policies are eligible for Bonuses?
Not all life insurance policies are entitled to receive the bonus amount. Only participating (with-profit) policies qualify for the bonus and the policyholders holding a participating life insurance policy will only qualify for the bonus payout. The participating policies take part in the investment profits of the insurance company which is shared with the policyholders in the form of bonus payment. The amount of bonus payable is not fixed and it may vary depending on the amount of investment income earned by the insurance company.
The bonuses are a percentage of the sum assured and these are declared at the end of every financial year. When declared, it becomes guaranteed. The insurance company has the discretion to decide on the rates of bonus. The policyholder receives 90% of the profits as the bonus and the remaining 10% of the surplus is kept for shareholders.
Types of Bonuses
Bonuses are categorized under four types for a participating life insurance policy.
1. Reversionary Bonus
The profits allocated to each participating policy are paid in the form of a Reversionary Bonus. A reversionary bonus adds value to the total amount payable to the policyholder or nominee. A reversionary bonus is usually declared at the end of every financial year and it is payable at the time of a claim.
There are two common types of reversionary bonuses, as specified below.
• Simple Reversionary
The simple reversionary bonus is calculated as a percentage of the sum assured. It is declared as per thousand of the sum assured every year.If the Simple Reversionary Bonus rate is Rs 50 per thousand of sum assured and sum assured of the policy is Rs 10 lakhs.
Bonus = 50 x (10,00,000/1000) = Rs 50,000
• Compound Reversionary
The compound reversionary bonus is also computed as a percentage rate, but it applies to the sum assured and to all the accrued bonuses previously available in the policy. The bonus of each year is added to the sum assured and the next year’s bonus is calculated on that the total amount. These bonuses increase with time due to compounding effect.
If the compound reversionary bonus of 5% is declared for the entire policy term and sum assured of the policy is Rs 10 lakhs.During the first year, the accrued Compound Reversionary Bonus (CRB) will be Rs 50,000 i.e., (5% of 10,00,000). In the second year, this Rs 50,000 will be added to the sum assured of 10,00,000, and now the bonus would arrive at 52,500 [5% of (10,00,000 + 50,000)].Compound reversionary bonus will increase year by year due to compounding impact.
2. Interim Bonus
Bonuses are usually declared at the end of the financial year. But, in case a policy matures or death occurs in between the two successive bonus declaration dates, the interim bonus is then payable. This bonus is calculated for the remaining days from the last bonus date.
3. Terminal Bonus
Terminal bonus (final bonus) is declared and added only for policies, which attain maturity. This bonus is offered to the policyholders for keeping the policy till its maturity date. This bonus thus will not be payable for policies which have been surrendered or for policies which have acquired paid-up value.
4. Cash Bonus
The cash bonus accrued in a year will be paid in the form of cash at the end of the financial year. This bonus is payable on a yearly basis rather than at maturity.
In a Nutshell,
These are the various types of bonuses payable and it may vary, depending upon the life insurance policy chosen and the insurer you opted for. It is advisable to check the type of bonuses applicable. You may check in the plan brochure or ask the agent regarding the bonus rate applicable to your policy.Also, you may see the past trends of bonus allocations to give you a better picture about the disbursement of different types of bonuses by the insurance company.It will help you get a clear idea about the bonus benefits you will be entitled for, upon buying a particular life insurance policy which is participating in nature.
Harjot Singh Narula,
Founder & CEO, ComparePolicy
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