Everything About Bonus in Life Insurance

What is a Bonus in an Insurance Policy?

Bonus means an add-on payment on and above the stipulated income. Thus Bonus as per its original meaning is a general term used for any extra income that a policyholder receives from his policy on and above the confirmed return known as the Sum Assured. This bonus can be a guaranteed bonus or a non-guaranteed bonus like a reversionary bonus declared annually or a terminal bonus that is declared by the company at the end of the policy term. These bonuses are paid to the policyholder at the time of maturity or death whichever occurs earlier. 

What Types of Policies are Eligible for the Bonus?

The traditional plans like the money-back policies or the endowment policies are either with-profit policies or without-profit policies and a with-profit policy is a policy that is eligible to receive a bonus. These types of policies are also known as participating policies. The policies that are without profit, also known as non-participating are not eligible to receive a bonus. 

Now, a participating policy is a policy which entitles a policyholder to get a share of the profits that is declared by the insurance company and on the other hand, a non-participating policy is a policy which is neither eligible to get a share of the profit made by the company nor is it eligible to any dividend declared by the company, and its returns generally are the guaranteed returns declared at the time of inception of the policy and is not dependent on the profit of the company. Thus it is clearly evident that the premium of a participating policy would be higher than that of a non-participating policy. 

So, that means that the premium you would need to pay would be on the higher side in order to be eligible to earn a bonus in your policy.

When is a Bonus Declared?

Bonus is declared once a year. Post completion of a year the bonus is declared, depending on the profit made by the company in the previous year. Thus the bonus is given in the form of an arrear. The total amount of the bonus that is earned in a policy depends on the investment done and also on the expenses and mortality value which needs to be paid for from that invested amount. The interest rate that the company expects to earn on the forthcoming year is also a decisive factor for the amount of bonus that the company would declare.

How to Calculate the Bonus?

The bonus is always declared on the Sum Assured and not the Annual Premium that you are paying in the policy. This bonus can either be a percentage of the sum assures or a certain amount paid per 1000 INR of sum assured.

It is easy to understand the former calculation as it can be figured out as a flat percentage of the sum assured but the later is calculated as follows:

If say for example the Simple Reversionary Bonus declared is INR 45 per INR 1000 of sum assured then it would mean that for a policy where the sum assured is INR 1,00,000 the bonus for that year would be INR 4,500. And if the policy is for 10years and the total bonus declared is a simple reversionary bonus, then the total bonus can be obtained by simply multiplying the number of years to it, and if the bonus is a compound reversionary bonus then the bonus can be obtained by calculating the total amount using the procedure to calculate compound interest.

At What Time in the Span of the Policy are the Bonuses Paid?

The simple reversionary bonus and the compound reversionary bonus is declared every year but is paid at the end of the term. The simple reversionary bonus is declared every year and is accumulated to be paid at the end of the term along with the sum assured, and the compound reversionary bonus is calculated on the sum assured and the bonus accrued the previous year together in a compounding format, but is paid by the end of the term.

The cash bonus is a bonus that is paid by the company to the policyholder every year, or as and when it is declared. This enables the policyholder to have an extra income every year.

And the terminal bonus, as the name suggests is calculated at the end of the term, and therefore the payment of the same happens only at the maturity of the policy.

Is Bonus a part of the Surrender Value?

Surrender Value is the value which a policyholder gets in case he discontinues a policy before the completion of the entire term and wants to withdraw the amount he is eligible to get from the policy. This surrender value is 30% of all the premiums paid by you minus the first year’s premium, and it does not include any bonus that has been accrued in the policy till the time of surrender.

If any policy is paying you the bonus accrued or a part of that bonus then it is known as a special surrender value.

The Various Bonuses that are Declared

There are various types of bonuses that are declared by an life insurance company. Following is a list of the same: 

1.Guaranteed Bonus – Guaranteed Bonus is declared in the participating policies also known as the with-profit policy. It is declared at the time of inception of the policy and is not declared every year like the simple reversionary bonus or the compound reversionary bonus which depends on the performance of the company and may differ from year to year. Thus the Guaranteed Bonus is a fixed bonus that the policyholder gets. There is an advantage to the same as the company has to pay a guaranteed bonus whether or not it makes a profit, but the disadvantage is that in case a higher profit is made by the insurance company then the guaranteed bonus amount does not go up and you lose out then. 

2. Reversionary Bonus

Reversionary Bonus is not guaranteed and is declared as per the performance of the company.

a. Simple Reversionary Bonus – When a company distributes a portion of its profit as a percentage on the basic benefits entitled to the customers it is known as a bonus. Thus a Simple Reversionary Bonus is an amount that is declared by the insurance company on the sum assured. This bonus is declared annually and is accrued to be paid at the end of the policy term or in case of a death claim whichever happens earlier, along with the sum assured and the terminal or any other bonus that the policy had gained. 

b. Compound Reversionary Bonus – Compound Reversionary Bonus is a bonus where the percentage is declared not only on the sum assured but also on the reversionary bonus already accumulated on the sum assured till date. This way the compounding effect is reached.

For example, if the reversionary bonus is 2.5% then the bonus amount on INR 1000 would be INR 25. Thus for a policy where the sum assured is INR 1,00,000 the bonus would be INR 2,500 for the first year. But unlike the simple reversionary bonus, the bonus in the second year would not be INR 2,500 only rather it would be 2.5% of INR 1,00,000 + INR 2,500. And this method of adding the bonus to the sum assured and then calculating the bonus in a compounded way is the way a Compound Reversionary Bonus works. This total is then added to the sum assured and the terminal bonuses (if any) at the end of the policy term or on the death of the insured whichever happens earlier.

3. Cash Bonus – A cash bonus is also a bonus that is declared by the insurance company every year depending on the profit made by the company. But the major difference that this has with the reversionary bonus is that the cash bonus is not accrued till the end of the policy tenure like the reversionary bonus and is paid to the customer every year. This enables the customer to have a steady income from the policy.

4. Interim Bonus – An interim bonus is declared by the insurance company at the end of every financial year. But whatever a policy matures in between these two financial years then the interim bonus is paid for the number of days the policy that been enforced in that year. This is done by calculating the bonus for the number of days it had been enforced since the last date of the bonus declaration.

5. Terminal Bonus – The terminal bonus is also a bonus that is declared in a with-profits policy. This bonus also depended on the performance of the insurance company. As the company declares a reversionary bonus depending on the profit it has made, in the same way, does the company declare a terminal bonus depending on the performance. This bonus is a one-time bonus that is declared at the end of the policy tenure. The payment of this bonus can be done by the company either at the completion of the term of the policy or at the time of the death claim, whichever happens, earlier.

6. Vesting Bonus- The Vesting Bonus is the total bonus that the policyholder is eligible to gain at the end of the policy term. This is paid either at the completion of the tenure of the policy or if death happens. This vesting bonus is accumulated with the sum assured and is paid thus to the policyholder. In one word it is the accumulation of the bonuses that the policy keeps on earning throughout the policy tenure and is paid at the time of maturity.

Summing up the Special Features of a Bonus that Needs to be Remembered

1. A bonus is declared only in a with-profits policy, also known as the participating policy. A without profit policy is not eligible for a bonus
2. If the bonus is not a Guaranteed Bonus then whether it would be declared or not declared depends on the performance of the insurance company, that is on the profit they make.
3. The bonus is thus only a part of the profit the insurance policy makes, and it is distributed by the company to its policyholders as a certain percentage.
4. Thus the amount of the bonus that would be declared by the company can vary from year to year.
5. This bonus is generally declared annually and at the time of maturity, as a terminal bonus in the latter case.
6. A bonus once declared is a part of your policy and is guaranteed to be a part of your maturity value or the value that would be paid in case of death of the insured before the maturity of the policy.
7. The terms and conditions of the policy decisions the quantum of the bonus that it would accrue. For example, any whole life insurance policy would be eligible to receive a higher bonus than any other type of insurance plan.
8. In case a policy becomes paid up, which means that the policy premiums are not paid any further then the bonus received in the policy till the date of paid-up remains intact, although no further bonus is accrued by the policy any more after the paid-up status is reached. And this amount is given to the policyholder at the time of maturity.
9. The bonus that has been declared in a policy cannot be cashed out by the policyholder at any time during the tenure of the policy. The bonus can only be got at the time of maturity.
10. The bonus of a policy is paid to the policyholder only at the time of maturity or in case of the death of the insured person whichever happens earlier. And in some cases, the surrender value also includes the bonus, but that depends from policy to policy

Thus a bonus is the add-on advantage you receive on and above the promised amount to you by the policy, namely the sum assured. This is most cases is not guaranteed and is declared by the company depending on its overall performance. And they keep getting accrued in the policy till the time maturity is reached, but, there are a lot of terms and conditions which might lead to the loss of the bonus, like a paid-up of a surrender. Thus it is always advisable to read the terms and conditions of the policy before buying the same, in order to confirm that you do not lose out on the utmost benefit that you are entitled to get from the policy.