5 Types of Bonuses in Life Insurance Policy in India – A Complete Guide 2023

Who would mind an additional bonus or an increment from their life insurance policies? Customers simply love discounts and benefits offered by their insurance plans. In this post, let us look at the various bonuses offered by life insurance policies in India.      

So, what is a bonus in insurance? The annual sum accumulated by a policyholder under a life insurance policy is called a bonus. The bonus offered by insurance companies with life insurance plans is paid either at the time of plan maturity or after the policyholder’s demise. It is good to know the details of bonuses that an insured can avail of as part of their life insurance policy.

Bonus in Life Insurance Policy

A bonus in life insurance is a sum accumulated by a policyholder on an annual basis. When you buy a life insurance policy, you pay premiums to your insurer, and in return, you get life coverage. The complete premiums paid by you create a pool of assets for the insurance company. This asset pool helps the insurer in settling claims, and the insurer further invests them in numerous bonds, debts, securities, etc.

Such investments help the insurer to create wealth. Later, this wealth is distributed among the eligible policyholders as a bonus. Bonuses are not guaranteed benefits and are offered to policyholders of specific plans, such as participating life insurance plans, among others.

Types of Bonuses in Life Insurance Policies  

There are five types of bonuses that a policyholder can avail of under a life insurance policy. They are: 

1. Simple Reversionary Bonus:

A simple reversionary bonus is a kind of bonus that is calculated as a percentage of the sum assured in terms of the basic policy benefit. The insurer declares this bonus every year at the end of the financial year. However, the amount received under a simple reversionary bonus can be claimed by the policyholder only at the time of maturity. Or it can be claimed by the policyholder’s nominee after the insured person’s death.

Let’s understand it with the help of an example. Suppose you have a life insurance policy of INR 5 lakh as the sum assured. Now, the insurer offers a simple reversionary bonus of 5% on the assured sum, which makes you eligible for INR 25,000 as a simple reversionary bonus every year.

2. Interim Bonus:

An interim bonus is accrued in a life insurance policy. The insurer offers an interim Bonus on plans which are mature or which are claimed within two bonus announcement dates. For instance, suppose your life insurance policy will likely expire on December 31, 2024. Now, at the end of the financial year 2023-24, you are likely to receive the final reversionary bonus on your plan. Hence, you can claim your interim bonus for 9 months from April to December 2024. Thus, if you raise a claim between the declaration dates of two successive bonuses, your insurer will calculate the interim bonus for the period starting from the last date of the bonus.

3. Compound Reversionary Bonus:

Unlike a simple reversionary bonus, in a compound reversionary bonus the percentage is applied to both the sum assured and the bonus accrued earlier. For instance, suppose you have a participating life insurance policy of INR 10 lakh, and you have earned a bonus of 4% on it all over the policy duration. This makes you eligible to receive a bonus of INR 40,000. So, this bonus amount would be added to the assured sum to determine your compound reversionary bonus as per the new sum assured.

4. Cash Bonus:

A cash bonus is an amount paid by the insurer to the policyholder in cash. This bonus amount is paid at the end of a financial year and is calculated as a percentage of the yearly premium paid by the insured. Let’s take an example here, suppose you have a plan with a sum assured of INR 2 lakhs. Now, the plan’s annual premium is INR 12,000, and the policy offers a 4% cash bonus. Hence, the insured will receive a cash bonus of INR 480.

5. Terminal Bonus:

A policyholder receives a terminal bonus as a one-time benefit at the end of a policy period. This benefit is offered to the policyholders for keeping the policy active and staying insured with the policy/insurer until maturity. Thus, the terminal bonus in life insurance is also called the ‘persistence bonus’. If a policyholder surrenders their life insurance policy before it matures or before the date of maturity, they will not be eligible for the terminal bonus.

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How Are Life Insurance Bonuses Calculated?

In general, a bonus in life insurance is calculated as per the terms and conditions of the insurance company as well as the policy bought by the policyholder. Here are two ways to compute life insurance bonuses.

1. As a certain sum assured percentage  

Here the bonus paid to the insured is calculated in terms of the percentage of your policy sum assured. For instance, suppose your policy sum assured is INR 20 lakhs. The rate of accrued bonus offered by the insurer is 2%. Now, you will receive a bonus of INR 40,000.

2. As a fixed amount paid per 1000 INR of your sum assured 

In this case, a certain amount of your policy sum assured regulates the bonus. Hence, suppose you have life insurance of INR 20 lakhs as a sum assured. The bonus calculated under the plan is INR 20 for each INR 1000 of your sum assured. Here, the bonus amount calculated would be INR 40,000.

Popular Life Insurance Companies India, 2023

To conclude 

There are several types of bonuses offered under your life insurance policy. If you want to estimate the benefits that you can earn from such bonuses, you can use the LIC bonus rate calculator. By carefully adhering to a policy’s terms and conditions, you can benefit from the bonus offered by life insurance policies and save enough.

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