Bonuses your insurance plans can offer

Anuj Agarwal

Do you know that you could earn a “bonus” even by investing in an insurance policy? In India, a majority of investors seek guaranteed returns on investments and a traditional life insurance policy is a sought after investment proposal, since it offers some returns in the form of bonuses in addition to a life cover. Let us explore some more aspects of this feature of life insurance.

Is every life insurance policy holder entitled to a bonus?

No, bonus is not shared with every policyholder. It is only paid to customers who have bought a traditional participating insurance policy such as the endowment policy, whole life insurance policy and money-back plan. They can avail of bonuses announced during the lifetime of the policy. Typically, each type of traditional policy has two versions – the participating insurance policy and non-participating insurance policy.

How is the bonus rate decided by a company?

The amount of bonuses declared annually depends on the amount of surpluses in the insurance company’s life fund. This, in turn, depends on economic conditions and equity markets. If a life insurance company experiences good surpluses year-on-year, it could pay a high-level of bonuses. However, if economic conditions are poor, insurance companies reduce the bonus rate to reflect the actual investment returns in the life fund. The bonus rate is decided after considering a variety of factors such as return on underlying assets, the level of bonuses declared in previous years and other actuarial assumptions (especially future liabilities and anticipated investment returns), as well as marketing considerations.

Types of bonuses

Insurers usually offer five types of bonuses — simple reversionary bonus, compound reversionary bonus, terminal bonus, interim bonus and cash bonus.

Simple reversionary bonus is declared annually on the sum assured and the accrued amount is paid out to the policyholder at the time of claim or maturity. On the other hand, when it comes to compound reversionary bonus, the bonus of each year is added to the sum assured and the subsequent year’s bonus is calculated on the compounded sum. The final accrued bonus is payable in case of claim or maturity.

Terminal bonus or persistency bonus is paid to the policyholder based on the performance of a participating policy. Offered at the discretion of the insurer, this type of bonus is paid at the time of maturity or death of the life assured during the term of the policy. It is accrued every year depending on the profit made by the insurer and paid at the time of maturity or death claim settlement. Usually, terminal bonus gives a good sum of money and it is important for a customer to hold on to the policy till the end of the term to avail this bonus.

Interim bonus is paid for those life insurance policies that mature or results in a death claim in between two bonus declaration dates. Simply put, if maturity of a policy or death claim happens before the bonus declaration date, bonus is paid on a pro-rata basis based on the interim bonus rate announced by the company against that particular policy.

Bonus can also be paid by the insurer in cash at the end of the year instead of accruing it year after year. Such bonus is referred to as cash bonus.

What should a policy buyer keep in mind about bonuses?

A policy buyer must check the types of bonuses that various plans offer, before deciding to buy a policy. This information can be confirmed through the plan brochure or after consulting with the insurance agent.

Once the policy is purchased, it is necessary that a policyholder remains abreast of bonus declarations made by their life insurer against one or more participating policies throughout the term of the policy and reap their benefits.

The author is MD and CEO, Bajaj Allianz Life Insurance. The views expressed in this article are his own.