A percentage of the sum promised, or a specific amount of the sum assured, is used to calculate the bonus.
All You Need to Know About Life Insurance Bonus
Life insurance is one of the most popular insurance products in the market. This is because it safeguards the financial needs of a policyholder's family after their unexpected demise. In this context, several insurance providers offer various add-ons or riders that enhance the overall benefits of an insurance plan.
Further, there can be a number of bonus amounts on top of the benefits. Continue reading this guide to know the meaning and types of bonuses in a life insurance policy.
What Is a Bonus in Life Insurance Policy?
A bonus is an extra sum of money that an individual gets on top of the base amount. This concept also applies to bonuses in a life insurance policy. In the case of a life insurance policy, it is the sum that is accumulated on an annual basis.
This bonus is payable when a policyholder dies or at the maturity of an insurance plan. This bonus is applicable over and above all advantages under a life insurance policy.
How Is Life Insurance Bonus Generated?
The premium that any policyholder pays becomes part of an insurance provider’s asset pool. The money from this asset pool is used while paying for insurance claims in the long run. The insurer invests a sizable portion of this fund in several government-backed debt instruments while a little potion is invested in equities.
The claim experience of an insurance provider and ROI (Returns On Investment) generate the profit, which the insurers distribute in the form of a bonus at the end of a financial year. The bonus rate is evaluated by several factors, such as:
- Returns on fundamental assets
- Bonus level announced in the last year, and more
How to Calculate Bonus in Life Insurance Policy?
When Is the Bonus Paid in Life Insurance Policy?
An insurance provider pays a bonus in the life insurance policy in the event of a policyholder's death or at the policy's maturity. For instance, if an insurance policy has a term of 30 years, a policyholder will receive the bonus after 30 years. Nevertheless, if a policyholder passes away after the 20th year, the insurance company will pay the bonus collected until the day of the demise of the nominee.
Note: Only in the case of a cash bonus an insurance company provides the bonus amount every year rather than paying during the maturity date or the policyholder’s demise.
What Are the Types of Bonus in Life Insurance Policy?
1. Reversionary bonusAn insurance provider calculated this bonus based on the compound interest. The annual bonus is added to the sum assured, and the following year's bonus is evaluated on the new sum assured. Reversionary bonus is further divided into the following categories:
2. Simple reversionary bonusOver time, the simple reversionary bonus accumulates, and the total is deposited into the plan account. The life assured has access to the simple reversionary bonus at the time of death and maturity.
3. Compound reversionary bonusCompound reversionary bonus is based on a portion of the sum insured and the bonus accumulated the previous year. It is once more paid as a component of the death benefit or maturity benefit.
4. Interim bonusIdeally, an insurer declares a bonus at the end of every financial year. Nevertheless, if an insured dies or the policy matures before the end of a financial year, an insurer declares an interim bonus. This is because the insurance policy might accumulate some bonus from the previous year and the date of the insured’s death or policy maturity.
5. Terminal bonusA final bonus or terminal bonus is only added to a life insurance policy when it reaches its maturity date. Insurers offer this bonus to policyholders so that they continue the policy till its maturity date. Hence, a terminal bonus will not apply if a policyholder decides to surrender the policy or if the policy has attained paid-up value.
6. Cash bonusAn insurance company declares a cash bonus at the end of every financial year and distributes the same in the form of cash. Policyholders receive this cash bonus annually rather than on the maturity date.
What Are the Tips on Selecting Life Insurance with Better Bonus in India?
To get the best bonus on their policy, applicants can consider following these tips to choose the best life insurance policy:
Tip 1: Before applying for a life insurance policy, applicants must determine the coverage amount required to fulfil their financial objectives. Further, policyholders should opt for sufficient coverage to safeguard their family’s future after their demise.
Tip 2: Buy a life insurance policy from reputed companies with a constant claim settlement ratio of more than 95% for years. In this regard, applicants can visit the official website of IRDAI (Insurance Regulatory and Development Authority) to know the latest claim settlement ratio of various insurance companies in India.
Tip 3: Purchasing a life insurance policy at a younger age comes at a considerably lower price than buying one at a later age.
Tip 4: Opting for a comprehensive plan will help policyholders cover the costs in case of unexpected medical emergencies. Individuals can opt for critical illness coverage, accidental death coverage, permanent disability add-on, etc., as rider plans on their ongoing life insurance plans.
These are the different types of life insurance bonuses, which can differ for every life insurance policy and provider. Hence, individuals must check the different bonuses applicable to their life insurance policy.
FAQs about Bonus in Life Insurance
Only ‘with profit’ or ‘participating’ policyholders can get a bonus for a life insurance policy. However, these bonuses usually tend to vary across plans.
Any money received upon the maturity of a life insurance policy or money received as a bonus is completely exempt from income tax under Section 10 if the premium paid on the life insurance policy does not cross 10% of the total sum assured for all policies issued post 1 April 2012 and 20% of the sum assured for policies issued before 1 April 2012. (10D).
The bonus is only available to participating (with-profit) policies, and only policyholders with participating life insurance policies will be eligible to receive the bonus payment.
Important Guides related to Life Insurance
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.