Life Insurance Bonus: Additional Payouts Based on Insurer’s Financial Performance

Definition:

A bonus is an extra amount that is paid to the policyholder in addition to the standard policy benefits. It is mostly based on the insurer’s performance and other factors, which add value to the insurance policy.

Contents

• What Is a Bonus in Life Insurance?
• Key Takeaways
• How Bonuses Work in Life Insurance
• Real-Life Example
• Types of Bonuses in Life Insurance
  • Reversionary Bonus
  • Compound Reversionary Bonus: 
  • Terminal Bonus
  • Interim Bonus
  • Cash Bonus
• Why Bonuses Matter for Policyholders
• Summary
• FAQs

What Is a Bonus in Life Insurance?

A life insurance bonus is an extra amount an insurer gives to a participating policyholder. These bonuses aren’t fixed and usually depend on the insurer’s financial performance. It is a reward for policyholders' loyalty until the accumulation of value in the policy.

Key Takeaways

If bonuses are part of your life insurance policy, these are some key facts to know.:

• An insurer can award bonuses only on participating life insurance policies.

• Offers are not fixed, and apart from the set down payment, they vary depending on the insurer's profits.

• Bonuses are of common types, such as reversionary bonuses, terminal bonuses, interim bonuses, cash bonuses, etc. 

• Bonuses increase the maturity or death benefits of the policy.

• Understanding the various types of bonuses in insurance will help you choose the right policies.

How Bonuses Work in Life Insurance

In a participating life insurance policy, the insurers invest the premiums collected from policyholders. Profits from the investments are divided as bonuses to the policyholders. The amount and frequency of bonus declarations are contingent on the company’s financial outcomes, meaning they are never assured.

Real-Life Example

Assume Mr. Sharma has entered into a participating endowment policy with a sum assured of ₹10 lakhs. Therefore, should the insurer declare a simple reversionary bonus of ₹50 per ₹1,000 sum assured, Mr. Sharma shall be entitled to an annual bonus of:

₹50 × (₹10,00,000 ÷ ₹1,000) = ₹50,000

This bonus is accumulated yearly and paid when the policy matures or in the event of the policyholder’s death.

Types of Bonuses in Life Insurance

Knowing the types of bonuses in life insurance can be useful for policyholders while making decisions:

Reversionary Bonus

• This bonus is added once every year to the policy and then forms a part of the guaranteed benefits.

• Simple Reversionary Bonus: It is calculated as a percentage of the sum assured.

Compound Reversionary Bonus: 

It is calculated on the sum assured plus bonuses accrued so far. 

Terminal Bonus

A one-time bonus that is typically paid at the end of the policy term or in case of death, and it is meant to reward very long-term policyholders.

Interim Bonus

Pays on a policy or claim that arises after two bonus declaration dates to ensure that the policyholder receives their due fraction of profits.

Cash Bonus

Cash bonuses are paid once a year, thus making them immediately available to policyholders.

Why Bonuses Matter for Policyholders

Bonuses add meaning to participating life insurance policies and provide an added financial benefit. More often than not, policyholders are rewarded for their commitment. These bonuses can, therefore, considerably augment either the maturity benefits or the death benefits of a policy. For one to be able to make sound financial decisions, one must have a good understanding of the types of bonuses and their implications.

Summary

Bonuses under any participating life insurance policy are a share of profits granted to reward policyholders for their loyalty. As a reward, such bonuses are not guaranteed and might or might not be paid. However, if paid, such bonuses greatly enhance the value of the policy. Few choices with eminent economic implications that confront a policyholder concerned with maximising their benefits are learning the types of bonuses and how they function.

FAQs

Below are some of the frequently asked questions on Bonus in Life Insurance

1. What is a bonus in life insurance?

A bonus is an addition to the payments made by the insurer to the holders of participating policies. It comes out of the profits that the insurer makes.

2. What are the types of bonuses in life insurance?

Common ones include reversionary-simple and compound-bonus, terminal, interim, and cash bonuses.

3. What is a reversionary bonus?

A reversionary bonus is credited to the policy every year, becoming a part of the guaranteed benefits payable usually on maturity or death.

4. What is a terminal bonus in insurance?

A terminal bonus is a one-time payment to a policyholder at the expiry of the policy or on death, to reward their long-term holding of the policy.

5. What does an interim bonus mean?

An interim bonus is declared and paid when a policy matures or a claim arises between two declaration dates for bonuses. The policyholders, therefore, get a fair share of profits.

6. Are bonuses in life insurance guaranteed?

No, bonuses depend on the financial performance of the insurer and are not guaranteed.

7. How do bonuses affect the policy's value?

Yes. As they mature on policies or death benefits are increased, and bonuses get the value of the policies to be realised by the policyholder or his nominees.

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