Know your Insurance bonus!

Beyond its financial connotation, the word “bonus” itself makes one happy! Similarly, for traditional life insurance policyholders, a bonus is one of the lucrative benefits as one type of return on the investment done. In India, a lot of us look for guaranteed returns on our investments & a Traditional Life Insurance Policy is a sought after investment proposal, since it offers some returns in addition to Life Cover. This article will help you understand more about Bonuses & remove any ambiguity with respect to the same.

Does every policy holder of life insurance get bonus?

No. Bonus is not shared with every customer or every policyholder. It is only paid to customers who have bought a Participating Insurance Policy such as traditional insurance policies like the endowment policy, whole life insurance policy and money back plan. Each type of Traditional Policy has 2 versions, namely the Participating Insurance Policy and Non-participating Insurance Policy.

The key features of Participating policies are:

• It will participate in the profits of the insurance pool i.e. It pays bonus to policy holders
• The percentage of bonus that is paid to the policyholder is not fixed.
• The premiums for participating policy are higher than the non-participating policy for a similar coverage and same customer criteria.

How is the bonus rate decided by a company?

The amount of bonuses declared annually depends on the amount of surpluses in the Life Fund. This, in turn, depends on economic conditions and equity markets. If a life insurance company experiences good surpluses year on year, it could pay a high level of bonuses. If, however, economic conditions are poor and less surpluses are expected, Insurance companies could reduce the bonus rate to reflect the actual investment returns in the Life Fund. The bonus rate is decided after considering a variety of factors such as the return on the underlying assets, the level of bonuses declared in previous years and other actuarial assumptions (especially future liabilities and anticipated investment returns), as well as marketing considerations.

Different types of bonus
Insurers usually offer five types of bonuses that include Simple Reversionary Bonus, Compound Reversionary Bonus, Terminal Bonus, Interim Bonus and Cash Bonus. While the Simple Reversionary Bonus will give you a bonus only on the sum assured, Compound Reversionary bonus is calculated as a percentage of the sum assured and all previously accrued bonuses.

Simple Reversionary bonus is declared annually on the sum assured and the accrued amount is paid out to the policy holder at the time of claim or maturity. On the other hand, when it comes to Compound Reversionary Bonus, the bonus of each year is added to the sum assured and the next year’s bonus is calculated on the Sum Assured and the attached bonus. And, the accrued bonus is payable in case of claim or maturity.

Terminal bonus or persistency bonus is one type of bonus paid to the policyholder based on the performance of a participating policy. Offered at the discretion of the insurer, this type of bonus is paid at the time of maturity or death of the life assured during the term insurance plans. Terminal bonus is accrued every year depending on the profit made by the insurer and paid at the time of maturity or death claim settlement. Usually, terminal bonus gives a good sum of money and it is important for a customer to hold on to the policy till the end of the term to avail this.

Interim bonus is paid for those life insurance policies that mature or results in death claims in between two bonus declaration dates. An interim bonus ensures that policyholders who claim benefits in middle of a policy year will get a credit for keeping the policy in force for that part of the year. To put it simply, bonus is usually accrued against a policy at the end of last financial year. But, if maturity of a policy or death claim happens before the bonus declaration date, bonus is paid on a pro-rata basis based on the interim bonus rate announced by the Company against that particular policy.

Bonus can also be paid by the insurer in cash at the end of the year instead of accruing it year after year. Such bonus is referred to as Cash Bonus.

Similarly, a policyholder should remain abreast with the bonus declarations made by their life insurer against one or more participating policies. It is advised to check the type of bonus your plan actually offers. It would be clearly written in the plan brochure or you can confirm it with the agent of your insurance company.

[Source: http://lifeinsights.bajajallianz.com/know-bonus/]