Types of Bonuses in Life Insurance & How To Calculate It?
Updated On Mar 12, 2024
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Don’t we love a little discount or the benefit of something? Indeed, we are all attracted by words like “sale” and “discount.” We understand the importance of life insurance, but how many of us know about the discounts offered on premiums by life insurance companies? The bonus in life insurance is an annual sum accrued by the policyholder on an annual basis. The amount is paid by the insurer either at maturity or when the policyholder dies. You must want to know about the types of bonuses in life insurance in detail. Read ahead to learn everything you need to know about life insurance bonuses.
What Is a Bonus in Life Insurance Policy?
The policyholders pay premiums to the insurance companies in exchange for life coverage. The total premium collected creates an asset pool for the insurers and helps them in the settlement of the claim. However, policyholders only claim their life insurance occasionally. As a result, a life insurance company invests funds in numerous assets like bonds, securities, other debts, and more when they are not in use.
These investments create wealth for the insurer, which is further distributed to the eligible life-assured as a bonus. Generally, bonuses are not “guaranteed” and are paid on participating life insurance plans.
How Many Types of Life Insurance Bonuses Are There in 2024?
Here’s a list of five different types of life insurance bonuses available for policies offered by insurance companies.
1. Simple Reversionary Bonus
A simple reversionary bonus is declared by the insurance companies at the end of each fiscal year. However, the policyholders can claim the amount only at the time of maturity or at death. For instance, if your policy provides a 5% simple reversionary bonus rate on the sum assured of Rs. 5 lakhs, you’ll be eligible to get a bonus of Rs. 25,000 each year.
2. Interim Bonus
The policyholders can accrue their reversionary bonuses at the end of each fiscal year. Now, you must be wondering, "What happens if I claim between?” Let's break it down with an example.
Mr. Harsh's life insurance policy will expire on October 31, 2025. Therefore, he is entitled to get the final reversionary bonus on his policy at the end of the fiscal year 2024–25. As a result, he can claim his interim bonus for about 7 months, starting from April 1, 2025, to October 31, 2025. If he raises a claim between two successive bonus declaration dates, the life insurance company will determine the interim bonus for the period beginning with the last bonus date. This ensures that life is assured and his beneficiaries get the bonus.
3. Compound Reversionary Bonus
A compound reversionary bonus is similar to but different from a simple reversionary bonus. Unlike a simple reversionary bonus, the percentage is applied to both the sum assured and the previously accrued bonus in a compound reversionary bonus.
For example, if you purchased a Rs. 10 lakh participating life insurance policy and earned a 4% bonus throughout the policy period, the benefit amount of Rs. 40,000 would further be added to the sum assured, and a bonus would be determined based on the new sum assured.
4. Cash Bonus
The cash bonus is paid to the policyholders in cash at the end of a financial year. It is determined as a percentage of the yearly premium paid by the insured. For instance, if the sum assured is Rs. 2 lakhs, the annual premium is Rs. 12,000, and there is a 4% cash bonus rate. Therefore, the cash bonus paid to the insured will be Rs. 480 (4% of the premium, i.e., Rs. 12,000).
5. Terminal Bonus
A terminal bonus is a one-time benefit paid to policyholders at the end of the policy period. It is a benefit given to the policyholders for being insured under the policy until maturity. Henceforth, it is also known as the “persistence bonus.” Any individual who surrenders their life insurance policy before the maturity date will not be eligible for the terminal bonus.
How Are Life Insurance Bonuses Calculated?
Generally, a life insurance bonus is calculated depending on the insurance company and the type of policy that is bought by you. Listed below are the two common ways to calculate life insurance bonuses.
As a percentage of the sum assured:
In this type, the bonus is determined as a percentage of the sum assured. For example, if your policy's sum assured is Rs. 20 lakhs and the accrued bonus rate is 2%, the policyholder will receive a benefit of Rs. 40,000.
As a certain amount per Rs. 1000 of the sum assured:
Sometimes a certain amount of the sum assured determines bonuses. Thus, if your life insurance plan has a sum assured of Rs. 20 lakhs and the bonus is calculated as Rs. 20 for every Rs. 1000 of your sum assured, the bonus amount would be Rs. 40,000.
Wrap Up
The bonus rate and the type of bonus provided under your life insurance policy are mentioned in your policy document. Therefore, adhere to all the terms and conditions listed in the policy carefully. Therefore, we can say that a bonus is another way to save on your premium amount.
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