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What is a Cash Bonus in Life Insurance?

  2/27/24 6:35 AM

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  2/27/24 6:35 AM   |

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Cash bonus, also commonly known as yearly bonus, is a non-guaranteed annual payout declared by the insurance company. Cash bonus may be received as an additional benefit in participating insurance plans. To understand what a cash bonus is, you need to first understand the basic principle behind a ‘participating’ plan.

Par or participating plans are insurance policies that not only provide life cover but also include an element of profit sharing, i.e., the insurance company provides a share of their annual profits with the policyholder.

This share of profits is called a ‘bonus’. If the bonus is paid out on an annual basis, then it is known as ‘cash bonus’. Cash bonus payouts can turn your insurance plan into an avenue of regular income! However, it is important to keep in mind that your cash bonus is variable and completely depends on the performance of your insurance provider. There may be a chance that cash bonuses may not even be declared if the insurance company’s profits are below expectations!

Which Insurance Plans Come with Cash Bonus?

Only participating insurance plans come with a cash bonus element. Generally, whole life insurance plans also tend to be participating plans. You can find out if a plan is participating or not by reading the policy’s brochure. The brochure will always clearly state if a plan is participating or non-participating. If the product brochure lacks a participating clause, then that insurance plan will not have any cash bonus element.

Do All Participating Plans Provide Cash Bonus?

Not necessarily! There are various types of par-plans and not all of them offer a cash bonus/annual payout. Some par-plans only offer payouts at maturity, with the profit bonus being added to the final maturity benefit. Some of the other bonuses that you might receive in a par plan include:

  • Revisionary Bonus- Value added to your maturity benefit based on the insurance company’s annual profits.
  • Interim Bonus- If you pass away or your policy matures in the middle of the financial year, then you will receive the interim bonus. Interim bonus is calculated based on the number of days that have passed since the last bonus declaration.
  • Terminal Bonus- This is the final bonus received in a participating plan. Terminal bonus is added to both the maturity benefit and the death benefit. However, you will not receive any terminal bonus if you lapse or surrender your policy before maturity.

Only the bonus you receive in the form of an annual payout is considered to be a ‘cash bonus’. Not all par plans provide annual income in the form of cash bonus! If you want a yearly bonus to boost your income, look for a par plan that clearly includes cash bonus as one of its benefits.

How is the Cash Bonus Calculated?

The rate of profit sharing is always decided by the insurance provider. Insurance companies have to ‘declare’ their cash bonus payouts each year, and the income you receive will depend on the bonus rate as well as the total money you have invested into the plan (as premiums). An insurance provider may also choose to not declare any cash bonus if they underperform in a given financial year.

It is important to note that participating plans are non-guaranteed, and hence have an element of risk. Just like any investment, there is always a chance of not getting the returns you desire. This is why it is essential to check an insurer’s year-on-year growth and solvency ratio before finalising your policy purchase. Look for a well performing insurance provider to ensure that your cash bonus becomes a reliable second source of income.

Benefits of Cash Bonus

Some of the benefits offered by cash bonus plans include:

  • Early payouts as soon as your profit shares start to accrue value.
  • Chance of greater returns if your insurance provider has a profitable financial year.
  • Choice to save your cash bonus to further compound the returns for subsequent years.
  • Acts as a second source of income that can help you fulfil your long-term financial goals.
  • Terminal bonus and revisionary bonus may also apply to your policy to further enhance your overall coverage.

What is the Difference Between Cash Bonus and Cash Value?

Cash bonus is specifically a benefit of participating plans. Your cash bonus may or may not be a part of your cash value. On the other hand, cash value is the overall value of your plan that is accumulated over the course of your policy term. Both guaranteed and non-guaranteed plans can have a cash value.

In a guaranteed plan, your cash value depends on the guaranteed returns (determined by the rate of returns), and in a non-guaranteed plan, you cash value depends on the various bonuses you receive based on the insurance provider’s profits in a financial year. Your cash value may be paid out regularly (if you choose income plans or have a cash bonus element in your plan) or may be paid out as a lumpsum after term end (maturity benefit).

Conclusion

Choose a par insurance plan with cash bonus if you want your policy to be a safety net for your family while also acting as an investment with regular returns. You can get regular income via cash bonuses by choosing plans like Edelweiss Life- Flexi-Savings Plan or Edelweiss Life Life- Legacy Plus.

 

Siddhant Dubey - Writer & Photographer

Siddhant works as a freelance content writer who is interested in a wide range of spheres from photography and personal finance to cooking. He is also an aspiring photographer striving to showcase life around him through his vision.

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