Types of Life Insurance Bonuses and How They Work

When you buy a participating life insurance plan, you are eligible to receive a share of the insurance company’s profits. These profits are shared in the form of ‘insurance bonuses’. By choosing a participating plan, your life insurance policy becomes a source of income alongside a means of financial security.

However, not all life insurance bonuses are the same. Different insurance policies have their own form of providing bonus payouts. It is also important to remember that bonuses are not guaranteed, and you will only receive a bonus if it has been declared by your insurance company. Below are a few of the common types of life insurance bonuses that are provided by insurers in India.

Meaning of Bonus in Life Insurance

There are multiple types of life insurance plans in India, one of which being ‘participating plans’. Participating plans or par plans are long-term insurance products that also provide a savings element alongside life cover. This savings element is paid out in the form of yearly bonuses.

In a par plan, your bonus is determined by the insurance company’s profits in a given financial year. Your insurer will announce a bonus rate each year, and this rate is not guaranteed or standardized. For example, on a profitable financial year, you may get a bonus rate of 10%, but on a poor financial year, your bonus rate may drop down to 5%. Hence, you bonus rate fluctuates as per your insurance company’s fluctuating profits.

Types of Life Insurance Bonuses

Revisionary Bonus-

Revisionary bonuses are directly added to your final payout amount. Each year, your insurance company will declare their reversionary bonus rate, and based on your sum assured, a bonus amount will be added to your maturity benefit. Generally, revisionary bonuses are only paid out at the very end of your policy term, but some plans may also have payouts scheduled during the policy term itself.  

There are two sub-types of revisionary bonuses you should be aware of.

Simple Revisionary Bonus: The first type, the simple reversionary bonus, is directly calculated against your sum assured.

Compound Revisionary Bonus: On the other hand, compound reversionary bonus is calculated against your policy’s total cash value, which includes your sum assured plus all the previous revisionary bonuses you have already received. Meaning that the principal amount of your compound reversionary bonus will keep increasing each year, and in turn, your total payout will also be greater when compared to a policy that offers simple revisionary bonus.

Cash Bonus-

If you prefer annual payments over a lumpsum at the end of your policy, then choose a policy with cash bonus payouts. Like revisionary bonuses, cash bonuses are also calculated annually based on the rate declared by your insurance company. However, instead of adding the bonus to your maturity amount, the cash bonus will be paid out to you immediately. Policies with cash bonus benefit are ideal if you want to generate a second source of income for your family.

Terminal Bonus-

Terminal bonus is only provided at the very end of your policy term as a maturity benefit. The terminal bonus is added to your final payout as a reward for sticking with your policy until the very end!

Terminal bonus will also be added to your policy’s death benefit payout in case of your untimely death during the policy term. This bonus provides an additional financial buffer for your loved ones over the life cover amount already included in the plan.

Loyalty Additions-

Some participating policies also have a loyalty addition benefit, where the insurance company provides additional payouts at predetermined intervals if you continue with their policy. Loyalty additions can vary from policy to policy, so ensure that you understand how your loyalty additions are calculated to get the best returns possible! Some insurance policies may also provide guaranteed loyalty additions, where the amount of money you get is predetermined, irrespective of the company’s bonus declaration.

Interim Bonus-

Interim bonus is only paid out in case the policy ends prematurely (death of the policyholder, policy surrender etc.). The interim bonus is calculated from the day of the last bonus declaration to the day when the policy was terminated. Basically, this is a bonus that is applied only if your policy ends during the time between two bonus declarations. This bonus will then be added to the final death benefit or surrender value that is to be paid out.

How is Bonus for Life Insurance Generated?

As mentioned above, life insurance bonus is primary decided by the annual bonus rate declared by your insurance company. However, some other factors also come into play while calculating the final bonus payout:

Premiums Paid- Bonus to be paid is calculated by applying the bonus rate to your total premiums paid. So, the higher your premiums the more bonus you will get each financial year.

Surplus- At the end of a financial year, the insurance company will calculate their surplus revenue (revenue after deducting liabilities). This surplus revenue will then be distributed as per the announced bonus rate to all par plan holders.

Profits- This is the primary source of all your bonus payouts. The higher the company’s profits, the greater will be your bonus. Insurance companies calculate their profits based on total premiums collected and number of claims settled. On a good financial year, you can expect higher returns when compared to a lacklustre financial year.  

Are Insurance Bonuses Always Calculated Annually?

Ideally, your insurance bonus should be calculated on a yearly basis. However, some plans may have a different timeframe for bonus calculations, so it is important to read the fine print before buying any insurance policy. Moreover, a bonus has to be declared by the insurance company, and the amount you receive as a bonus will completely depend on the company’s declared rate.

If your insurer’s profits are not up to par in a given financial year, then they might not declare any bonus at all! This means that insurance bonuses are non-guaranteed and are subject to certain risks. Keep this fact in mind while buying a participating insurance plan.

Policies Eligible for Life Insurance Bonus

Bonuses are non-guaranteed and offered only in participating plans. If you have a non-participating savings plan, then your returns will be guaranteed, but you will not be eligible for any profit-sharing/bonuses. However, certain participating plans, such as Edelweiss Life- Flexi Savings Plan, offer both guaranteed and non-guaranteed returns. The guaranteed returns will be based on the predetermined internal rate of returns decided at the inception of your policy, while the non-guaranteed bonus element will be based on the bonus declaration made by the insurer.

Conclusion

Understanding the different types of insurance bonuses will help you choose a policy that best fits your financial plans. If you want your savings to grow exponentially then look for insurance plans that offer compound revisionary bonus. Alternatively, if you would prefer to get annual payouts then choose a plan that offers cash bonus. Please remember to check an insurance company’s past bonus declarations before buying a participating plan! A history of positive bonus declarations is a good indicator of a successful insurance company that provides well-performing par plans. Also, check the insurer’s claim settlement ratio to ensure that your family is well taken care of in your absence. 

FAQs

What is the meaning of revisionary bonus?

Revisionary bonus is the bonus amount that is added to your maturity benefit. This bonus is calculated each year based on the bonus rate and your premium amount. The calculated sum is then added to your future maturity benefit.

What is the meaning of terminal bonus?

Terminal bonus is the bonus that is calculated at the very end of your policy (maturity or death). This bonus is calculated per the terminal bonus rate and your total premium paid (alternatively may also be calculated using your sum assured). The resultant terminal bonus amount is then added to your maturity benefit.

What is interim bonus?

Interim bonus is the bonus that is received if your policy ends prematurely (due to death or surrender) during the interim period between two bonus declarations.

What is the difference between interim bonus and reversionary bonus?

Revisionary bonus is declared at the end of each financial year and is added to your maturity benefit. On the other hand, interim bonus is only calculated if your policy ends prematurely, and it is calculated based on the time that has elapsed since the last bonus declaration.

Is life insurance bonus taxable?

Yes, bonus from life insurance is taxable. However, you can apply for tax exemptions under Section 10(10D) if your premium paid does not exceed 10% of the sum assured.

 

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.