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.

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. The first type, the simple reversionary bonus, is directly calculated against your sum assured. 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!

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. This bonus will then be added to the final death benefit or surrender value that is to be paid out.

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.

Do Guaranteed Returns Plans Offer Bonuses?

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 Tokio 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. 

 

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.