Life insurance offers these 5 types of bonuses: which policies include them and how are they calculated? Full details..
A bonus is something every salaried employee looks forward to each year. However, this concept is not limited to employment alone; life insurance policies also include a provision for bonuses, known as "life insurance bonuses." This is an additional amount paid by the insurance company to the policyholder over and above the basic sum assured. Let us explore everything you need to know about this.
**Where do insurance companies source the bonus funds from?**
When a policyholder pays a premium, that amount becomes part of the insurance company's total assets. The company invests a portion of these funds in government securities or bonds and another portion in equities (shares).
These investments generate returns for the insurance company, creating a surplus. The company then distributes this surplus—or additional amount—to its policyholders in the form of a bonus.
**Which policies offer bonuses?**
Not all insurance policies include a provision for bonuses. Only "participating" (profit-sharing) insurance policies offer this feature. In these policies, the policyholder receives a share of the company's profits as a bonus. Term plans and Unit Linked Insurance Plans (ULIPs) do not offer bonuses because they lack a profit-sharing mechanism.
**Types of bonuses and their calculation**
**Simple Reversionary Bonus:** This is added annually based on a fixed percentage of the policy's sum assured. Payment is made only upon maturity or a death claim. For instance, if your sum assured is ₹5 lakh and the bonus rate is 2%, the annual bonus would amount to ₹10,000.
**Compound Reversionary Bonus:** In this case, the annual bonus is calculated based on the total accumulated amount, which includes bonuses from previous years. In other words, it grows like compound interest. For instance, suppose a bonus of ₹10,000 is earned in the first year at a rate of 2% on a sum assured of ₹5 lakh. In the following year, a bonus of ₹10,200 would be earned at the same 2% rate on the total amount of ₹5.10 lakh.
Interim Bonus: If the policy matures or the policyholder passes away before the bonus is officially declared, the company pays an interim bonus to cover the intervening period. This is calculated based on the time elapsed from the last declared bonus until the date of policy maturity or the claim event.
Cash Bonus: This is received in cash at the end of the year. One does not have to wait for the policy to mature to receive it. For example, if you pay an annual premium of ₹20,000 and the bonus rate is 2%, you would receive a cash bonus of ₹400 at the end of each year.
Terminal Bonus: This is a one-time bonus awarded only when a policy is maintained for a long duration. It is payable solely upon maturity or death; it does not apply to surrendered or paid-up policies.
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