Life Insurance Bonus: What is life insurance bonus, how is it generated and how beneficial is it for you?

If you've ever thought that a bonus is simply extra money earned at work, wait a minute. Life insurance also has a similar concept, called a life insurance bonus. This is an additional amount the insurance company pays you over your basic sum assured, and you receive it either when the policy matures or when a claim is made.

Below, we explain in simple terms how this bonus is earned, which policies qualify for it, and how it's calculated.

How is the bonus generated?
When you pay a premium, the amount becomes part of the insurance company's total assets. The company invests this money primarily in government securities and a small portion in equities.

The returns from these investments and the company's claims experience combine to create a surplus. This surplus is distributed among its policyholders as a bonus. If the company's asset value exceeds its liabilities in a given year, this additional amount is also given as a bonus.

Which policies offer bonuses?
Only participating (With-Profit) policies offer bonuses. These policies provide a share of the company's profits. These include reversionary bonuses, cash bonuses, interim bonuses, and terminal bonuses.

Term plans and ULIPs (Unit-Linked Plans) do not offer bonuses because they do not offer a profit-sharing option.

Types of Bonuses
1. Simple Reversionary Bonus
This bonus is added to your sum assured annually at a fixed percentage. Payment is made only upon maturity or death.

2. Compound Reversionary Bonus
In this case, each year's bonus is calculated by adding the previous bonus to the new total. This means it grows like compound interest.

3. Interim Bonus
If the policy matures or the policyholder dies before the bonus is declared, the company pays the remaining bonus as an interim bonus.

4. Cash Bonus
This bonus is paid in cash at the end of the year. You don't have to wait for the policy to mature to receive it.

5. Terminal Bonus
This is a one-time bonus that is only available if you continue the policy for a long period. It is paid only upon maturity or death.

How is the bonus calculated?
Simple Reversionary Bonus
Suppose your sum assured is ₹500,000 and the bonus rate is 2%. The annual bonus can be up to ₹10,000.

Compound Reversionary Bonus
₹10,000 in the first year, 2% of (₹5,00,000 + 10,000) = ₹10,200 in the second year. It increases yearly.

Interim Bonus
This bonus is calculated from the last declared bonus to the date the policy matures or is claimed.

Cash Bonus
If you paid an annual premium of ₹20,000 and the bonus rate is 2%, the cash bonus would be ₹400.

Terminal Bonus
This is available for long-term policy tenure, but does not apply to surrendered or paid-up policies.

Disclaimer: This content has been sourced and edited from TV9. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.