Everything You Need to Know About Bonus in Life Insurance

2-August-2021 |

A life insurance policy is considered the best lifeline for safeguarding your family's financial needs. It provides a sum assured to the nominee in case of your unexpected demise. Insurers provide add-on rider# benefits to enhance the benefits of an insurance plan. Over and above the benefits assured, there can be additional bonus amounts too. It is exclusively an extra amount paid above the assured amount. The bonus is available to the customers based on the policies they hold. Let us understand more about bonus features in life insurance policies. 

 

What is a bonus in insurance, and how is it generated?

 

For an insurer, the premium amount paid by the policyholders towards life insurance policies forms the asset. It is used to manage the business and pay for the death claims as and when required. However, a major portion of the asset is invested by the company in securities, bonds and other financial investments for profits. The surplus amount made by the profits over the liabilities is used to pay the policyholders as a bonus. It is generally distributed at the end of every financial year. 

 

Not all kinds of policies qualify for a bonus payment. There are some policies 'with profit' and the other type 'without profit' ensured. Logically speaking, the premium for such 'with profit' policies are generally higher on a comparative scale. 

 

Also, it should not be confused with the guaranteed1 additions provided in a guaranteed return plan. 

 

Guaranteed return plans in India

 

A guaranteed return plan is a life insurance policy that provides a life cover and additionally, guaranteed1 returns. The sum assured and the guaranteed1 returns are decided at the policy inception. The returns are provided at maturity. There are different payout methods. It can either be received as a lump sum amount, guaranteed1 annual income or regular monthly income. As the returns are guaranteed1 in a guaranteed1 return insurance plan, long term financial commitments such as a child's marriage, education etc., can be well planned. 

 

These are guaranteed1 returns of the policy and are not included in the company's declared bonus. TATA AIA policy provides guaranteed return insurance plan with varied benefits and customizable features. It is the best way to insure and invest for life.

 

Types of bonuses2 in insurance

 

There are five basic types of bonuses2 in insurance. Let us discuss them here.

 

  1. Simple Reversionary Bonus - It is a bonus that is accrued to almost every traditional life insurance plan. A percentage of the sum assured gets added to the policy every year until maturity or the death claim.

  2. Compound Reversionary Bonus - It is a bonus calculated as a percentage of the sum assured and the bonus accrued last year. It is again paid as a part of the maturity benefit or death benefit.

  3. Interim Bonus - Bonus is accrued in a life insurance policy every year. However, there is a chance that the death claim occurs before the next declaration. Hence, insurers declare an interim bonus to set the policyholder's family at an advantage and benefit from the bonus amount. 

  4. Cash Bonus - In a cash bonus, the insurance company will declare the bonus and make it available for the policyholder to receive it as cash in hand. It is not accrued till maturity like the other types and is provided at the end of every year. 

  5. Terminal Bonus - Terminal Bonus is a one-time bonus in insurance paid when the policyholder runs through the entire policy term or a period specified by the insurer. Thus, it is not applicable if the policy is surrendered before the term ends.

 

If the policyholder is planning to get a 20-year insurance policy, he or she can ask the insurer for the bonus rate declared in the past 20 years along with the life insurance quotes. It will provide a fair idea of the bonus amount.

 

How is the life insurance bonus calculated?

 

The bonus declared by a life insurance company is based on the return from securities and other investments made. It also depends on the mortality rate of the year. 

 

The exact bonus of the life insurance company is based on its profitability. The quantum of profit varies every year. And, hence the bonus also keeps varying every year. The bonus assured to the policyholder depends on the life insurance policy and the policy term. It is calculated as a certain percentage of the sum assured in the individual plan.

 

It can be a certain amount per Rs. 1000. For example, suppose the bonus is Rs. 50 for every Rs. 1000. In that case, if the sum assured for a life insurance policy is Rs. 5 lakhs, then the bonus amount is Rs. 25000. 

 

The calculated bonus is generally provided as a maturity benefit or to the nominee in case of a death benefit. It is also provided when the policy is surrendered. Some of the insurers allow the policyholders to encash the bonus during the policy term. 

 

Conclusion

 

We have seen what the bonus offered by a life insurance plan is. We have also discussed how it is generated and how it is different from the guaranteed1 return plan. Also, we have discussed the different types of bonuses2 and their features. Before getting a life insurance plan, the policy seeker must inquire about the bonus policies and the insurer's payment structure. It will help in making better decisions based on additional profits. The policyholders must handle doubts or clarifications regarding bonus at inception because it is not subject to revision as per the needs. Stay invested for a long time, for the sum assured and the bonuses2 to accrue on a large extent! 

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Disclaimer
  • Insurance cover is available under the product.

  • The products are underwritten by Tata AIA Life Insurance Company Ltd.

  • The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.

  • For more details on risk factors, terms and conditions please read the sales brochure carefully before concluding a sale.

  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.

  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.

  • 1Guaranteed Returns/Payouts depend on Plan Option, Policy Term, Premium Payment Term and Age at entry

  • #Riders are not mandatory and are available for a nominal extra cost. For more details on the benefits, premiums and exclusions under the riders please refer to the Rider Brochure or contact our Insurance Advisor or visit our nearest branch office.

  • 2These bonuses are not guaranteed in nature. The Company may declare Cash Bonus rate annually in advance. The Cash Bonuses if declared, will be applicable provided all due premiums have been paid.