Benefits of bonus in life insurance

‘Bonus’ is simply the additional amount or reward that a person is entitled to get in excess of the base amount. On the same pattern, the Insurance industry also provides a bonus to its policy holders. In this framework, bonus is the extra sum which gets accumulated to any insurance policy on a yearly basis which will be paid to the policyholder on the maturity of the plan or in the case of  his death. This will be paid on successful completion of all the premiums due for a particular number of years. To get this bonus, it is mandatory that your policy should be ‘with – profits’ type, which is known as a participatory policy as well.

 
How is Bonus Calculated?

All the premiums given by the policy holders get accumulated in the corpus of insurance company which they utilize in the pay out of claims. A huge portion of this fund is invested in government – secured debt instruments and little portion is invested in equities to attain a potential return. On the basis of earnings from these investments and claims experience, the insurance company plans to distribute the profits to ‘with – profits’ policyholders in the form of bonus. The rate of bonus is determined after taking into account several factors like return on fundamental assets, level of bonus announced in preceding years and other actuarial suppositions. This bonus is offered on the basis of conventional plans build in plan structure.

Types of bonuses offered by insurance companies

Simple Reversionary Bonus: Under this type of bonus the calculation is done on the basis of simple interest. At the end of each policy year, an annual bonus is declared and it is accumulated to be paid at the time of claim or at maturity. The interest of the bonus which has been accrued, does not earn cumulative interest and only principal amount is considered in the interest calculation. For example, Mr. Ankit has a policy of Rs 5 Lakhs and company declared SRB of Rs 25 per 1000 of sum assured which is Rs 12500 only which will be accumulated and paid at the time of maturity or claim.

Compound Reversionary Bonus: In this type of bonus the calculation is done on the basis of compound interest. In the calculation, the  bonus will be computed as a percentage on the sum assured and on all preceding accumulated bonuses. The bonus of every year is added in the sum assured and the next year’s bonus is determined on the new increased amount. For example, Mr. Rohit has a participatory policy of Rs 5 lakhs and the company announced a bonus of 3 % throughout the policy term which will be Rs 15000. This amount will get added to the sum assured and earn interest from very next year on increased amount.

Terminal Bonus: Terminal Bonus is also known as persistency bonus which is paid once, i.e. at the time of maturity of the policy. It is a sort of loyalty bonus given to a policyholder for maintaining the policy till maturity. Its value is not guaranteed and will be disclosed only at the time of policy maturity.

Interim Bonus: This type of bonus is payable only for those policies which mature or are claimed in between two bonus announcement dates. While the policy has already accumulated the bonus of last financial year, there is a short period between the bonus declaration date and maturity date. In such cases, a bonus is added on the basis of interim policy rates announced by the company. Such policies ensure that the policy holder who claims for reimbursement will get the credit for keeping policy active for that period of the year.

Cash Bonus: The insurance company makes a decision to pay cash bonus. In such instances, the bonus accumulated in a year will be paid at the end of the year. This provides an opportunity for the policy holder to get bonus year after year rather than at maturity.

These are various types of bonuses offered by insurance companies. 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 the insurance company. Also check the bonus rate of your policy which will give you a clear idea about the benefits which you will get from it.

 




Source: InvestmentYogi.com is one of the leading personal finance portals in India