With-profit Policy in Life Insurance

A with-profit policy in life insurance is a plan where the policyholder receives a guaranteed sum assured along with a share of the insurer’s profits, which are distributed as bonuses. In India, these bonuses are typically added to the policy’s value and paid on maturity or death, rather than being given as cash during the policy term.

Contents

• Key Takeaways
• How Does a With-profit Policy in Life Insurance Work?
• Real-life Example
• Types of Bonuses in a With-profit Policy
• With-profit Policy vs Unit-linked Policy
• Why With-profit Policy Matters for Policyholders
• Conclusion
• Frequently Asked Questions

Key Takeaways

• Profit participation: Policyholders are given periodic bonuses based on the performance of the insurer.

• Guaranteed and non-guaranteed returns: The policy comprises a guaranteed sum assured and variable bonuses.

• Ideal for long-term savers: Ideal for policyholders who want a stable insurance cover with moderate returns.

• Bonus types: These are reversionary bonuses (added annually) and terminal bonuses (added at maturity or claim).

• Risk level: Less than market-linked policies, as returns are determined by the profitability of the insurer rather than the stock market performance.

• With-profit policy benefits: Offers both long-term security and long-term growth.

How Does a With-profit Policy in Life Insurance Work?

A with-profit policy in life insurance pools the premiums from multiple policyholders into a participating fund. The insurer invests this fund in various assets, such as government securities, bonds and equities, to generate profits. Here is how the mechanism typically works:

1. Premium Collection: Policyholders pay regular or single premiums into a common participating fund.

2. Investment by Insurer: The insurer invests these funds in a balanced mix of low- and medium-risk instruments.

3. Profit Generation: At the end of each financial year, the insurer evaluates the total surplus after accounting for expenses and claims.

4. Bonus Declaration: A part of this surplus is distributed among policyholders as bonuses, depending on the policy’s type and tenure.

5. Benefit Payout: On maturity or in the event of death, the policyholder (or nominee) receives the sum assured along with accrued bonuses.

Real-life Example

Suppose Rajiv buys a with-profit policy in life insurance with a sum assured of ₹10 lakh and a 20-year term. Over the years, the insurer has declared annual bonuses that accumulate to ₹3 lakh. On maturity, Rajiv receives ₹13 lakhs, which is his guaranteed sum plus bonuses.

Types of Bonuses in a With-profit Policy

The bonuses in a with-profit life insurance policy are a key feature that enhances the policy’s value. These bonuses are typically:

• Reversionary Bonus: Declared annually and added to the policy once announced. It becomes a guaranteed part of the payout.

• Terminal Bonus: A one-time bonus paid at maturity or death, rewarding policyholders for staying invested until the end.

With-profit Policy vs Unit-linked Policy

Why With-profit Policy Matters for Policyholders

Taking a with-profit policy in life insurance offers a dual advantage: financial protection through the sum assured and wealth accumulation through bonuses. Here is why it is valuable:

• Steady Wealth Growth: Bonuses enhance the policy value gradually, ensuring a growing corpus for long-term needs such as retirement.

• Lower Investment Risk: Returns depend on the insurer’s profit-sharing, not on stock market fluctuations, making it less risky than ULIPs.

• Guaranteed Coverage: The sum assured remains protected regardless of the company’s financial performance.

• Long-term Commitment Rewards: Staying invested till maturity attracts terminal bonuses, maximising overall returns.

• Ideal for Conservative Investors: The with-profit policy benefits those who prefer predictable, stable returns rather than market-linked uncertainty.

Conclusion

A with-profit policy in life insurance is a smart choice for individuals seeking both protection and profit participation. It provides life cover, stable returns and an opportunity to share in the insurer’s surplus. For policyholders who value long-term stability, this plan serves as a reliable instrument for wealth creation with insurance security.

Frequently Asked Questions

Below are some of the frequently asked questions on With-profit Policy in Life Insurance

What is a with-profit policy in life insurance?

A with-profit policy in life insurance is a plan where policyholders receive the sum assured plus bonuses declared by the insurer from its profits. It combines guaranteed protection with additional growth potential.

What does with-profit policy meaning imply?

It means a life insurance policy that participates in the insurer’s profits. A portion of the company’s surplus is distributed to policyholders through periodic bonuses.

What are the main with-profit policy benefits?

It offers life cover, stable long-term returns and bonus additions based on the insurer’s performance, providing both protection and savings.

How are bonuses determined in a with-profit policy?

Bonuses depend on the insurer’s annual surplus after expenses and claims. They can be reversionary (added yearly) or terminal (paid at maturity).

Can the bonuses in a with-profit policy fluctuate?

Yes, since bonuses depend on company performance, the declared amount can vary each year. However, once added to your policy, they become guaranteed.

Is a with-profit policy better than a ULIP?

It depends on your goal. If you prefer guaranteed stability, a with-profit plan suits you better. If you are comfortable with market risks for potentially higher returns, ULIPs might be more suitable.

Are with-profit policies risk-free?

Not entirely. While your capital is largely protected, bonus rates may vary based on the insurer’s profitability.

Can I surrender my with-profit life insurance policy?

Yes, but surrendering early may result in a lower payout, as bonuses accrue over time. It is best to stay invested until maturity.

Who should buy a with-profit policy in life insurance?

Individuals seeking a mix of guaranteed life cover, long-term savings and low-risk returns should consider this policy type.

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