Types Of Bonuses Under Life Insurance Policy

Types Of Bonuses Under Life Insurance Policy

Life insurance policies provide financial protection to the policyholder’s family and offer additional bonuses to participating policyholders.Shape

Written by : Nitin Bhatia

Reviewed by : Akanksha Gangvany

Akanksha Gangvany

2020-04-21

1220 Views

5 minutes read

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In simplest of words, a bonus is an extra amount or reward you receive over and above you base salary/ amount. A similar concept aligns with life insurance companies, which make bonus payments to their policyholders on a yearly basis beyond the basic sum assured they are entitled to. This additional amount can be either paid out on policy maturity or upon the death of the insured, based on your policy terms.

Table Of Content:

How is Life Insurance Bonus generated?

The premiums paid by policyholders of a life insurance company become a part of its asset pool, which is utilised for the payment of claims in the future. A large portion of these funds is invested in debt instruments secured by the government while allocating little to equities.

The insurer’s claim experience and returns on investment are responsible for profit, which it distributes as bonus payments at the end of the financial year. Any excess assets after the company’s assets and liabilities are valued may also generate an extra amount to be distributed as an insurance bonus.

Did You Know?

The bonus amount payable isn't fixed? Instead, it may fluctuate depending on the investment income earned by the insurance company.

Claim Settlement Ratio

Types of Bonuses Paid Out to Insurers 

From reversionary bonuses to terminal bonuses in insurance and cash bonuses, there are numerous life insurance bonuses paid out to insurers. Here is the list of types of bonus in insurance you to explore:

 

Bonus TypesDefinition
Simple Reversionary BonusCalculated on the Sum assured, a simple reversionary bonus amount is declared annually, even by the best life insurance policy in India, and is accrued to the policy every year till it matures or a claim is filed. 
Compound Reversionary Bonus

When the previous year’s bonus adds up to the sum assured and the next year’s bonus is computed on this consolidated amount; it is referred to as compound reversionary bonus. The calculation is based on compound interest. However, since it is reversionary in nature, the bonus is payable upon maturity or death of the policyholder as above.

Click here to use - Compound Interest Calculator

Interim BonusUsually, a bonus declaration is to be done by the end of a financial year; however, in cases where the death of the insured or policy maturity happens before that, the life insurance company declares an interim bonus in insurance. 

Cash Bonus 

 

 

These are yearly incentives distributed by insurance companies to policyholders at the end of the year. It is calculated as a percentage of the annual premium and provides the insured with immediate cash benefits instead of waiting until maturity.
Terminal BonusA one-time bonus, also referred to as a persistency bonus, is paid by the best life insurance policy in India to the policyholder for running the policy for a determined period as per the insurer’s discretion. A terminal bonus is paid only when the policy matures or upon the insured's death.

Things to Consider While Claiming a Life Insurance Bonus 

Now that you know what is bonus in insurance, here are some of the pointers that you must consider when claiming a bonus in life insurance. Keep scrolling through to know the details:

  • It is essential to check the policy documents in detail to understand the life insurance bonuses, as different companies offer different policies based on the requirements and offerings.

  • To understand the terms and conditions, you must review the insurance policy documents thoroughly.

  • You must consider numerous factors like bonus in insurance declaration frequency, how the insurance company calculates, and any specific eligibility criteria requirements.

  • Ensure you stay informed about details like when the insurance bonus is declared and what steps to take to claim it.

  • In order to keep track of the amount received from the life insurance policy, you must calculate the bonus in life insurance after receiving it.

  • The bonus can be used for numerous purposes, like purchasing additional coverage, adding to policy cash value, or more. Thus, you must consider your financial goals before using the bonus.

  • Also, staying aware of any tax implications or requirements related to the bonus payment will be best.

Wrapping Up! 

Thus, a bonus in insurance is a reward for investing in a participating policy. The insurance company offers the extra amount based on the policyholder's financial performance. iSelect Smart360 Term Plan from Canara HSBC Life Insurance is one of the best life insurance policies in India, which offers you the flexibility to choose coverage for your lifetime or a limited period, along with the choice of death benefits and premium payment options.

You can also enhance your coverage by opting for inbuilt cover for accidental death, permanent disability, and child support, among others. So make the right choice, tune with your needs and provide your family the security of a better future by choosing the right insurance policy.

Glossary:

  • Debt Instruments: These are financial assets such as bonds or loans issued by governments or corporations and offer fixed returns over a specified period.

  • Annual Premium: The yearly payment made by the policyholder to the insurer to maintain coverage under a life insurance policy.

  • Bonus Declaration Frequency: It refers to the frequency at which insurance companies announce bonus payouts to policyholders.

  • Financial Performance: It measures an insurance company's profitability and stability based on its revenue, expenses, and investment returns.

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FAQs Related To Bonus in Insurance

The premium usually gets impacted by numerous factors, such as an increase in age, change in lifestyle and habits, and more. The effect of a bonus on the premium amount is unlikely.

The frequency of bonus declarations can vary based on factors such as plan type, company performance, and market conditions. When selecting an insurance provider or policy, it's advisable to assess the consistency and rate of bonuses. However, it's essential to note that past bonus performances by life insurance companies do not necessarily predict future declarations.

Only participating (with-profit) life insurance policies are eligible for bonus payouts. The policyholders with such policies exclusively qualify for bonus distributions. The bonus payable is not fixed and may differ depending on the investment income earned by the insurance company.

To calculate a bonus in a life insurance policy, insurance companies typically use a predetermined formula based on factors such as policy type, duration, and performance. Bonus calculations may involve considerations like the sum assured, premium payments, and investment returns, ultimately determining the bonus amount accrued to the policyholder.

 It is calculated as a percentage of yearly premiums. 

The bonus amount that the life insurance policyholder receives is tax-free under Section 10(10D) of the Income Tax Act.