Some life insurance policies allocate a share of their profits as a bonus and pay to the insured person when they reach certain milestones. Put simply, just like employees receive bonus as extra amount or reward over and above their base salary, a similar concept exists in the realm of life insurance companies. Firms make bonus payments to their policyholders on a yearly basis beyond the basic sum assured they are entitled to.
Here's an FAQ on bonus payments:
When is the bonus paid?
This additional amount can be either paid out on policy maturity or upon the death of the insured, based on the policy terms.
How is it determined?
The bonus is dependent on several factors such as return on company assets, bonuses declared in the previous year, claims filed, expected interest rates in the future and several other estimates.
What are the types of bonuses paid?
Simple reversionary bonus, compound reversionary bonus, cash bonus, interim bonus and terminal bonus are some of the types.
Simple reversionary bonus usually happens once a year and is instantaneously added to the value of the policy. They are only paid when the policy matures or when someone dies. On the other hand, when the previous year’s bonus adds up to the sum assured and the next year’s bonus is computed on this consolidated amount, it is referred to as compound reversionary bonus.
A cash bonus is given to the policyholder every year and it is calculated as a percentage of the yearly premium. Meanwhile, the insurance company pays an interim bonus when a policy is deferred amid a financial year due to claim or maturity.
Terminal bonus is a one-time bonus added only at the time of maturity or claim. It is paid as per the insurers’ discretion for policies that have run their full term.
How is life insurance bonus calculated?
Bonus is either computed as a percentage of sum assured or as a certain amount per Rs 1,000 of sum assured. For example, if the bonus is Rs 50 per Rs 1,000 for a policy with a sum assured of Rs 1 lakh, the annual bonus will be Rs 5,000.
Are all policies eligible for bonuses?
Not all life insurance policies are entitled to receive the bonus amount. Only participating (with-profit) policies qualify for the bonus and the policyholders holding a participating life insurance policy will only qualify for the bonus payout.
Is the amount of bonus payable fixed?
The amount of bonus payable is not fixed and it may vary depending on the amount of investment income earned by the insurance company.
