Earn Bonus in Life Insurance Policies
A bonus is usually referred to an extra amount of money or reward one receives in addition to the base amount. The same concept goes with bonuses payable to the policyholders in a life insurance policy as an amount accumulated on a yearly basis and payable on the life assured death, surrender, or maturity of the plan. Hence, this bonus amount is payable over and above the benefits applicable under a life insurance policy.
How is Life Insurance Bonus generated?
A huge portion of the premium paid by the policyholders is invested in government-secured debt and some in equity. The insurer’s claim experience, returns on investment, and actuarial factors together are responsible for profit. The insurers distribute the profits to the participating policyholders based on the earnings received as a return on these investments. Any excess of assets after the valuation of the company’s assets and liabilities, may also generate an extra amount to be distributed as a bonus.
Types of bonuses:
Reversionary Bonus: The profits allocated to each participating policy are paid by the insurance company to the policyholders in the form of a reversionary bonus. A reversionary bonus is usually declared at the end of each fiscal year and is paid at the time of claim.
Some of the common features of a bonus are:
Bonus rates are declared depending on the investment experience of the company.
Once a bonus is allocated to a policy, it is almost always guaranteed to be paid out.
Once allocated, the amount so allocated is called a “vested bonus”.
Vested bonuses are of 2 types:
Simple Reversionary:
Simple reversionary bonus is always a percentage of the sum assured and is declared as per thousand of the sum assured.
Simple Reversionary Bonus = 50 x (10,00,000/1000) = ₹ 50,000 (where Sum Assured = ₹ 10 lakh and Bonus rate is ₹ 50 per thousand)
Compound Reversionary:
A compound reversionary bonus is also calculated in a way similar to a simple reversionary bonus, but it applies to the sum assured and to all the accrued bonuses previously available in the policy. Here, the yearly bonus is added to the sum assured, and following year’s bonus is calculated on the compounded amount. These bonuses grow over time due to their compounding impact.
Interim Bonus:
Bonuses are usually declared at the end of each financial year. But there are situations when an insurance company needs to pay the bonus in the mid of a financial year in case of a death claim or if a policy matures. The insurance company then needs to declare the bonus between the two successive bonus declaration dates; the interim bonus is then payable. This bonus is calculated and added on a pro rata basis as per the interim bonus rates announced by the insurer.
Terminal Bonus:
A terminal bonus is referred to as a one-time bonus as well as persistency bonus that is declared by the insurance companies and are added to only those policies that attain maturity. This bonus is paid only when the policy matures and will not be paid for surrendered or paid-up policies.
Life Insurance Bonus calculation
The bonus is either computed as a percentage of the sum assured or as a certain amount per ₹1000 of the sum assured. For example, if the bonus is ₹ 50 per ₹1000 for a policy with a sum assured of ₹ 1 lakh, the annual bonus will be ₹ 5000. For a policy term of 10 years, the simple reversionary bonus comes out to be ₹ 50,000. The bonus rate is dependent on several factors, such as the return on company assets, bonuses declared in the previous year, claims filed, expected interest rates in the future, and several other estimates.
Conclusion:
Only participating policies are entitled to the bonus declared at the end of each financial year. This applies to traditional plans such as endowment or money back plans. Although there are various types of bonuses that may vary from plan to plan, you are advised to read the policy brochure carefully when buying a life insurance plan and confirm the benefits offered by the insurer, including the bonus, if any. You can also refer to your financial advisor to understand the plan benefits and type of bonus applicable.
Comments
Post a Comment