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We all love a little extra benefit - be it in the way of a discount when you go shopping or a small bonus in your paycheck; we are all attracted to the idea of some additional benefits in our day-to-day lives.
You will be glad to know that you can also get bonuses in life insurance plans. As opposed to the fixed benefits you may receive at specified intervals, bonuses add a surprise element, making it more effective and exciting.
Let us find the meaning, types of bonuses in life insurance and how they are generated.
What is a Bonus in Life Insurance Policy?
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.
How is a Life Insurance Bonus Generated?
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.
Different Types of Bonus in Life Insurance
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.
Compound reversionary bonus
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:
Financial year |
Amount on which bonus is calculated |
Bonus amount |
Year 1 |
₹5,00,000 |
₹15,000 |
Year 2 |
₹5,15,000 (₹5,00,000 + ₹15,000) |
₹15,450 (3% of ₹5,15,000) |
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.
Conclusion
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.
