Bonus is the additional sum of money that the investor receives along with the base amount. We get a bonus for good performances in the job, or if we have invested in the share market. Likewise in the life insurance policy, there is also scope for bonuses. It is a distribution of profit given to the policyholders. The condition is that the policyholder should pay all the premiums over a certain period. The policyholder can get this life insurance bonus after the completion of the policy term, or if the policyholder dies or if he surrenders the policy whichever is early.
Now a question may arise in your mind that does all the life insurance policy gives a bonus? Certainly not. The life insurance policy which gives bonus is participating policy. The life insurance policies which doesn’t give bonus are non-participating. The participating policies in life insurance take part in the investment. Thus when there is a profit it is distributed among the policyholders. The bonus is not fixed. It depends on the yearly profit. So it varies each year. While distributing the bonus the insurance companies give 90% of the bonus to the policyholders and the rest 10% is for the shareholders.
Types of Bonuses in Life Insurance
In life insurance, four different types of Life Insurance bonuses are there for the policyholders. They are:
1. Reversionary Bonus
Reversionary Bonus is the type of bonus the Life Insurance Company gives to its policyholders or the nominee at the time of claim. Every year the insurance company declares the profit. If there is a profit they give a reversionary bonus to the policyholders. Each year the company adds the reversionary bonus and pays it at the time of claim.
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There are two types of reversionary bonuses. It is due to the calculation procedure of the interest. Some Life Insurance companies calculate the interest compound, some keep it simple. So two types of reversionary bonus are:
Simple Reversionary
When the Life Insurance Company calculates the reversionary bonus in simple interest we get Simple Reversionary Bonus (SRB).
Suppose the Life Insurance Company declares the Simple Reversionary Bonus rate as $20 per $1000 every year. You have a life insurance policy that gives you a coverage of $ 1 Million. So if you pay all the premiums we will get the bonus at the time of claim. The bonus amount will be:
20 x (1000000/1000) = $20000
So you or your nominee will get $ 1.2 Million when the policy matures.
Compound Reversionary
When the interest calculation of the bonus is compound we get Compound Reversionary Bonus (RCB). In this process, the Insurance Company adds a bonus to the policy amount. So the next year they calculate the RCB by taking the previous year’s amount. So the bonus increases due to the compound interest calculation.
Let us assume that the compound interest rate is 5% throughout the policy term. You have a life insurance policy that gives you a coverage of $ 1 Million. So in the first year, you get a bonus of $ 50000. After adding the bonus with the policy amount we get $ 1.05 Million. The next year’s calculation will be on the $ 1.05 Million. So the reversionary compound bonus will be:
5% x (1000000+50000) = $ 52500.
In this way, the amount of reversionary compound insurance will increase yearly. We will receive more amount of money at the time of claim as it provides interest on the bonus.
2. Interim Bonus
Usually, all the Life Insurance Companies declare a bonus at the end of the financial year. But you can do a Life Insurance Policy at any time of a year. So your policy may mature between two successive bonus declarations. The insurance company then pays the customer an interim bonus. They calculate the remaining days form the last bonus and pay the interim bonus to its policyholders.
Suppose the maturity date of your policy is 1st July. So you will get the interim bonus from January to June. You will get the interim bonus for 6 months.
3. Terminal Bonus
Terminal Bonus is a type of life insurance bonus the company gives to the policyholders when their policy matures. The condition of the bonus is that you have to keep the policy until it matures.
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If you surrender your policy before maturity you won’t get terminal bonus.
4. Cash Bonus
In a cash bonus, the Insurance Company pays the bonus by cash per year until the policy matures. The company declares the bonus and pays each policyholder at the end of a financial year. They do not add it with the sum assured.
Features of Life Insurance Bonus
- There is no termination of the policy if you change your policy into a paid-up policy.
- At the later part of the policy, there is an increase in the value of paid-up.
- You will get the paid-up value only at the time of maturity or death.
- There is no extra cost for the conversion of the policy.
Conclusion
These are the types of bonuses you can get from a Life Insurance Policy. There is no fixed value for the bonus. It depends on the company. There are a lot of insurance companies in the insurance sector. So when you are going to buy a life insurance policy read the policy paper carefully. Ask the agent the type of Life Insurance Bonus the insurance policy is offering. You can also check it from the internet from the bonus the company is offering for the past few years. It will give you a clear idea of how much bonus you can get from the policy. After reviewing all the insurance companies buy the policy from the insurance company which is offering a better deal. If you find the article informative share it. If you want to know more comment in our comment box below.
