Nowadays, life insurance comes with a variety of benefits. Along with providing a life cover, insurers also provide other features and financial benefits to make life insurance a more lucrative addition to your portfolio. Participating life insurance policies, for instance, offer bonuses to the policyholder at specified intervals.
If you opt for a participating plan, you become eligible for various types of bonuses in life insurance coverage. Each type of bonus is given on a specific condition and for a certain reason. Before we explore these in detail, let’s understand how a participating plan works and how bonuses figure into it.
Bonuses in a Participating Life Insurance Policy
As compared to a non-participating policy, a participating plan is where the policyholder gets to enjoy bonuses based on the profits of the insurance company. As the term suggests, the policyholder is ‘participating’ in the profits that the company earned in a particular period. This ‘participation’ comes in the form of bonuses. How and when the policyholder receives a bonus is defined in clear terms in the policy’s terms and conditions.
Now that you know how a participating plan works, let’s explore the different types of bonuses in life insurance policies.
Types of Bonuses in Life Insurance
Simple Reversionary Bonus
Each year, the policyholder accrues a certain percentage of the sum assured as a simple reversionary bonus. The bonus amount is accrued annually but is not paid out each year. Instead, it is added to the sum assured and can be enjoyed by the policyholder during the policy’s maturity, minus the standard deductions. It is also present in the sum assured amount in case a death benefit claim is raised.
For instance, let’s assume Mr Nikunj has a participating plan with a sum assured of ₹50 lakhs. As per his policy wordings, he will receive a simple reversionary bonus at an annual rate of 3%. This means, in a year, he will accrue ₹1,50,000 as a bonus that will be added to the sum assured.
Compound Reversionary Bonus
In a participating life insurance policy, the sum assured increases with each year as the simple reversionary bonus is added to it. In the next year, the bonus is calculated on this increased sum assured amount. This type of bonus in a life insurance policy is called a compound reversionary bonus.
You can enjoy the compound reversionary bonus throughout your policy term, or as defined by your policy wordings, minus the standard deductions.
Let’s continue with the previous example to understand the compound revisionary bonus.
In the second year of Mr Nikunj’s policy, his sum assured has grown to ₹51,50,000 (50 lakhs + 1.5 lakhs {simple reversionary bonus accrued in the previous year}). Now, the bonus rate of 3% will be calculated not on the original sum assured (₹50 lakhs), but on the new increased amount (₹51,50,000).
So, 3% x 51,50,000 = 1,54,000
Next, this bonus amount will be added to the sum assured.
51,50,000 + 1,54,000 = 53,04,000 = the new sum assured.
In the next year, the reversionary bonus will be calculated on the new sum assured amount of ₹53,04,000.
Cash Bonus
Not all types of bonuses in life insurance are added to the sum assured. Some, like the cash bonus, are paid out to the policyholder each year. There is another feature that distinguishes a cash bonus from the different types of bonuses in life insurance. It is calculated as a percentage of the premium and not the sum assured.
So, for instance, let’s assume the life insurance premium of your policy is ₹20,000. Your cash bonus is calculated at 5%. In this case, you will receive ₹1000 as a cash bonus each year.
Terminal Bonus
This bonus can be considered a benefit given by the insurance company to policyholders for being diligent with their plan. It is given when the policyholder completes the policy term, i.e., when the plan matures. It may also be given when a nominee raises the death benefit claim. The terminal bonus is given at the discretion of the insurer.
Usually, the bonus is not awarded if you surrender the policy. However, in some cases, if certain conditions are met, the insurer may provide the terminal bonus during surrender as well. These conditions include:
- The policyholder must have paid all the premiums on time.
- The surrender is being done after the policy has completed at least five years.
- The policy is in force.
Hence, paying premiums on time is important to enjoy all life insurance benefits consistently.
Interim Bonus
Bonuses are usually declared on an annual basis. But what if the policy matures or a claim is raised between two bonus declaration dates? In such a case, the policyholder (or the nominee, as applicable) will receive an interim bonus. The rate for this bonus is usually mentioned in the policy wordings.
To calculate this bonus, the insurer will consider the time that has occurred since the last bonus was declared till the date the policy matured/claim was raised.
Let’s take another example:
Mr Shailesh’s life insurance policy matured on 31st September 2024. He last received his bonus in April 2024. Now, his next bonus would have been in April 2025. However, since his policy expired in September 2024, the insurer will consider the period between April ’24 and September ‘24 only. He will receive an interim bonus based on this period.
To Conclude
It is important to note that each insurer may have separate conditions and wordings when it comes to the different types of bonuses in life insurance. If you are purchasing a participating life insurance plan, read the policy wordings carefully before signing the proposal form.
Participating plans may have a higher life insurance premium compared to regular term plans due to the bonus component. Hence, remember to compare life insurance quotes to get the right value for your buck. A life insurance calculator can make the process easier.
While additional life insurance benefits are always welcome, keep in mind that your life cover should not be compromised. Opt for necessary life insurance riders and choose a solid sum assured amount to ensure a safe financial future for your loved ones.
#Bonus rate may vary from time to time based on Company’s Investment Performance.
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