Types of Bonus in Life Insurance

A bonus is an extra sum a policyholder may receive over and above the death benefits or any other pre-decided benefits of the selected plan. Typically, in a life insurance policy, the bonus amount is accumulated and paid to the policyholder annually.

The bonus in life insurance is payable at the maturity of the insurance plan or along with the death benefits in case of the policyholder's death.

When you purchase a life insurance policy, you pay a certain premium in return to the insurance provider. Similarly, everyone willing to buy this product must pay a premium (which may vary from one individual to another based on different factors).

These funds collected as premiums are set aside as an asset pool and later utilised to settle claims. However, instead of keeping the funds idle, the insurance provider invests in various securities like debt securities with a minor exposure to equity.

Over time, these investments earn profits, which are then distributed to participating (eligible) policyholders through bonuses.

Insurance providers offer the following types of bonuses in life insurance:

Simple reversionary bonus 

The insurance company declares the simple reversionary bonus at the end of each financial year. But these bonuses are paid out only at maturity or death claims. A percentage of the sum assured is added as a bonus every year, and the accumulated sum is paid at the mentioned time.

Example: If you purchase a policy of a sum assured of ₹5 lakh with a simple reversionary bonus at the rate of 3% of the sum assured, you are eligible to receive a bonus of ₹15,000 each year.

This bonus type in insurance is similar to a simple reversionary bonus with one significant difference. The percentage of the bonus is not only applied to the sum assured but also to the previously accrued bonuses. This bonus is also paid on maturity or death claims.

Example: The calculation of bonus on a policy with a sum assured of ₹5 lakh with compound reversionary bonus @3% will be:

Cash bonus 

Unlike the above two bonus types in insurance, a cash bonus is not accrued annually and is paid as a part of maturity or death benefits. Instead, it is declared and paid to the policyholder in the form of cash at the end of the financial year.

Interim bonus 

Insurance companies declare bonuses at the end of the financial year. However, the interim bonus is payable in case of policy maturity or death of the policyholder between the two successive bonus declarations. The interim bonus is typically calculated for the remaining days from the last bonus declaration date.

Example: If your policy matures on September 30, 2023, and the last bonus declared was on March 31, 2023, the remaining six months' bonus from April 1, 2023, to August 31, 2023, is paid as an interim bonus.

Terminal bonus 

Terminal bonus is like a reward given by the insurance provider to the policyholder for continuing with the policy until maturity. It is a one-time benefit shared only at the policy maturity; hence, if the policyholder surrenders the policy, they will not be eligible for this benefit.

Before selecting a life insurance plan, learning about the bonus policies and the insurer's payment structure is essential. Hence, it is always recommended to read the terms and conditions and understand the features of a plan before buying.

Moreover, consider buying a life insurance policy from a reputed provider like Tata AIA with a high claim settlement ratio, various plans to choose from, multiple touch points and digital support features at affordable rates.