The bonus rate is decided after considering a variety of factors such as return on the underlying assets and others
Bonus is a reward or anything extra that one gets over and above the receivable. Your life insurance policy too earns such bonuses, in the form of additional sum that gets accrued to the policy on a yearly basis.
The amount is paid to the policyholders upon maturity of the plan, or in case of an unfortunate death.
What comes as a bonus to you is the insurance company’s distributable surplus income based on the earnings from investments and claims. Premiums paid by policyholders are pooled within the insurance company's life fund and it is used to pay out claims.
A large part of the life fund is invested in government-secured debt instruments, with a small portion invested in equity to achieve a desired return. The insurer distributes a part of its surplus income to the policyholders in the form of bonus.
The bonus rate is decided after considering a variety of factors such as return on the underlying assets, level of bonuses declared in previous years and other actuarial assumptions.
Bonus is offered on traditional plans, which are built in to the plan structure. To avail of bonus, it is important that the type of plan you have purchased is a ‘with-profits’ one, often known as a participating policy.
These policies participate in the surplus, which gets shared in the form of a bonus to policyholders.
The common types of bonus offered by insurers are simple reversionary bonus, compound reversionary bonus, terminal bonus, interim bonus and cash bonus.
Simple reversionary bonus (SRB) is calculated on the sum assured only. This bonus is declared annually and is accrued to be paid out at the time of a claim or maturity.
Compound reversionary bonus (CRB) is calculated as a percentage of the sum assured and all previously accrued bonuses. The bonus of each year is added to the sum assured and the next year’s bonus is calculated on the enhanced amount. As seen from table above, the CRB to be accrued at the end of the 10th year is much higher, as compared to the SRB of the same year.
Terminal bonus, also known as a persistency bonus, is a bonus paid to indicate an overall performance of a participating policy. The terminal bonus is paid at the time of maturity or death of the life assured. This form of bonus may be given after staying in the policy for a pre-determined time period and is offered at the discretion of the insurer.
Interim bonus is payable for those policies that mature or result in a death claim in between two bonus declaration dates. While the policy has already accrued the bonus declared at the end of the last financial year, there may be a short period in between the bonus declaration date and the maturity/claim date for which the policy has not received bonus. In such instances, bonus is added on a pro-rata basis using the interim bonus rates declared by the company. An interim bonus ensures that policyholders who claim benefits in midst of a year will receive credit for keeping the policy in force for that part of the year.
Cash bonus is something the insurance company may decide to give in cash, i.e. bonus accruing in a year will be paid to the policyholder at the end of the year. This gives the policyholder an opportunity to receive the bonus year on year rather than the usual way of accruing till bonus maturity.
Thus while evaluating a traditional policy, it is a good idea to consider beforehand the type of bonus that your plan offers. This would be mentioned in the brochure of the plan, or you could also check with your agent/intermediary.
While choosing your traditional plan, make sure to check the bonus rates offered by them over the years. These rates are usually published on the insurer’s website and will give you an idea of the kind of benefits you stand to gain from the particular policy.
Additionally, it is recommended that you check the company’s website as few insurers publish the declared bonus rate on their official website.