In the insurance sector, a bonus is an additional sum which is accrued to the life insurance policy on an annual basis. This amount is paid out by the insurer to the policyholder at the time of either maturity or sudden demise. Let’s know it in detail.
How is Bonus Generated?
Insurance companies invest a huge portion of the premiums collected in government-secured debt instruments and a minor portion in equities. Based on the earnings received from these investments, the insurer distributes profits to participating policyholders. The rate of bonus is determined by various factors, such as return on fundamental assets, level of bonus announced in the previous year and other actuarial factors. To become eligible for the bonus, it is mandatory that your policy should be participating or ‘with profits’ type.
When is Bonus Paid?
The bonus amount is paid upon maturity or death of the policyholder. For example, for a term of 30 years, bonus will be paid only after 30 years. However, if the policyholder dies after the 10th year, the insurer will pay bonus accumulated until that day to the nominee.
Types of Bonuses Offered by Life Insurance Companies
Life insurance companies offer the following types of bonuses:-
Compound Reversionary Bonus:- The calculation is done on the basis of compound interest. The yearly bonus is added to the sum assured and the next year’s bonus is calculated on the new sum assured amount. For instance, Mr. Raj has a participating policy of Rs 10 lakhs and it earned a bonus of 4% throughout the policy tenure which will be Rs 40,000. This amount will be then added to the sum assured, i.e, Rs 10 lakhs in this case, and bonus will be computed on this new sum assured.
Cash Bonus:- It is given to the policyholder on a yearly basis and it is computed as a percentage of the yearly premium. For example, if the sum assured is Rs 2 lakhs, cash bonus rate is 4% and the annual premium is Rs 12,000, then the bonus paid to the policyholder will be Rs 480 (4% of 12,000).
Interim Bonus:- It is paid on those policies that mature or are claimed between two bonus announcement dates. While the policy has already accumulated bonus of the previous year, there is a gap between the bonus declaration date and maturity date of the policy. In such a case, the insurer calculates the bonus on the basis of interim policy rates.
The bonuses covered in a policy are clearly explained in the policy document. At the time of buying a policy, you should always confirm the benefits with insurer. It is important that you have a clear understanding of what is being offered to you.