Various Bonus Types Offered by a Life Insurance Policy

These bonuses result in a steady increase in the plan's value over the years for policyholders with participating (with-profit) policies.

What Is a Bonus in Life Insurance?

A bonus is an extra amount added to your policy. It accumulates annually and is paid out either upon maturity, upon death, or at surrender, whichever comes first. The moment a bonus is declared, it becomes part of your guaranteed benefit.

Bonuses are only available to policies that are taking part in profits. Plans like ULIPs or term insurance don't share profits, so they don't fit into this framework. When you sign up for a participating plan, the insurer puts a big chunk of the premiums it collects into stable investments like government-backed securities and high-quality debt. After paying off debts and covering running costs, the extra money is divided. Usually, policyholders receive approximately 90% of these profits, while shareholders retain the remaining 10%.

The important point to remember is that bonuses aren’t fixed. They depend on the company’s investment returns, claim experience and financial performance during the year.

With that context, let’s go through the different bonus types you may encounter in a life insurance policy.

Term Plans

₹1
Crore

Life Cover

@ Starting from ₹ 13/day⁺

VIEW PLAN

₹50
LAKH

Life Cover

@ Starting from ₹ 8/day⁺

VIEW PLAN

₹75
LAKH

Life Cover

@ Starting from ₹ 12/day⁺

VIEW PLAN

Reversionary Bonus

This is the core bonus type in most participating plans. A reversionary bonus is declared annually and added to the sum assured of your policy. Once added, it cannot be revoked. It becomes payable only at claim or maturity, not in the middle of the policy term.

Reversionary bonuses come in two variants:

Simple Reversionary Bonus

This is calculated as a rate per thousand of the sum assured. The calculation stays linked only to the original sum assured, not the accumulated bonuses.

Compound Reversionary Bonus

This grows faster because each year’s bonus is added to the sum assured, and the next year’s bonus is calculated on the revised total.

Interim Bonus

Bonus declarations usually happen once a year. But claims and maturities don’t wait for the financial year to end. What happens then?

If your policy matures or a claim arises between two declaration dates, the insurer adds an interim bonus. This ensures that policyholders remain fairly compensated even if their payout falls mid-year.

The insurer calculates the interim bonus for the number of months (or days) between the last declared bonus and the date of maturity or death.

Terminal Bonus

The terminal bonus, also referred to as the final bonus, is a one-time payment made at the end of the policy term. It’s a reward for holding the policy for the long run.

Unlike reversionary bonuses, the terminal bonus is not guaranteed every year. It is declared only when the insurer feels the long-term performance of its investment portfolio justifies the payout.

A terminal bonus is paid only:

• at maturity, or

• upon death.

The policy is not paid if it is surrendered prematurely or has acquired paid-up status too early in its tenure. Since long-term persistence boosts the insurer’s investment stability, the terminal bonus recognises and rewards that consistency.

Secure Your Family Future Today

₹1 CRORE

Term Plan Starting @

Get an online discount of upto 15%^#

Compare 40+ plans from 15 Insurers

View Plan

⁺Standard T&C Applied

Cash Bonus

Not everyone wants bonuses added to the sum assured. Some policyholders prefer liquidity. That’s where the cash bonus comes in.

A cash bonus is paid out at the end of each financial year as a direct cash amount. It doesn’t accumulate, doesn’t enhance the maturity benefit, and doesn’t wait until the policy ends.

This structure suits policyholders who want regular inflows while still keeping their life insurance protection active.

Some insurers calculate cash bonuses as a percentage of:

• the annual premium, or

• the sum assured.

Cash bonuses offer flexibility, particularly for individuals who view their insurance policy as a hybrid between protection and a yearly supplemental income.

How Bonuses Are Generated?

Every premium collected by the insurer goes into a pool used for:

• paying future claims,

• running the company, and

• funding investments.

Most insurers invest conservatively, primarily in government securities and high-quality debt instruments, with a smaller allocation to equities. The surplus generated from these investments, after accounting for liabilities, forms the basis of bonus declarations.

Since market performance varies, bonus rates fluctuate from year to year.

Which Life Insurance Policies offer Bonuses?

Only participating plans can offer bonuses, such as:

• traditional endowment plans,

• whole life plans, and

• Some participating money-back policies.

Why Understanding Bonus Types Matters?

Bonuses can significantly change the value of your policy over time. Yet many buyers overlook them when comparing plans. Before choosing a participating policy, it helps to:

• Look at the insurer’s past bonus track record,

• Understand which bonus types apply,

• Check how the bonus is calculated, and

• Read the policy brochure carefully.

Small annual bonuses may not seem exciting, but over a 20- or 30-year horizon, they can lift your maturity amount by a wide margin.

Wrapping It Up:

Life insurance bonuses are basically your share of the insurer's profits. They reward being patient, being disciplined with money, and sticking with something for a long time. Knowing how each bonus works makes it easier to understand when you buy or review your policy.

Plans that let you participate may cost a little more than plans that don't, but the long-term benefits of bonuses, reversionary, interim, cash, or terminal benefits can make the extra money worth it. A good policy from a strong insurer can turn these yearly payments into a real safety net for your family's future.