Life insurance is undeniably one of the most essential financial tools that provides financial support in the event of illness or death. It is a binding agreement under which you pay a small premium in exchange for a sizable payout when you need it. To cater to the needs of customers, policies now involve benefits like guaranteed returns as well. There are various types of life insurance policies that will help you fulfil different needs such as – protection, savings, and investment.
The insurer is required to pay a death benefit (also known as the sum assured) if you pass away within the policy term. Nevertheless, if you live through the term, you might be eligible for a maturity bonus, depending on the type of your life insurance policy.
This blog talks about life insurance bonuses, their types, and the bonus calculation formula.
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A life insurance company declares a bonus at the end of a financial year. The declaration of a bonus depends on the performance of the company. When any surplus assets, such as the investments of the policyholders who passed away, are evaluated following the evaluation of the company's assets, the company declares bonuses for other policyholders that can be given to them at maturity or along with the sum assured.
Life Insurance Bonus
A bonus is simply an additional sum of money or reward you receive in addition to your base compensation. A similar idea is shared by life insurance providers, who give policyholders bonuses each year in addition to the minimum sum assured to which they are entitled (depending on the type of policy they have). Depending on the terms and conditions of your policy, this additional sum may be paid out either at policy maturity or upon the insured's demise.
Life Insurance Bonus Calculation
A life insurance company uses the premiums paid by policyholders as part of its accumulated assets, which are used to cover claims in the future. The profit, which the insurer distributes as bonus payments at the completion of the financial year or policy maturity, is generated by the insurer's claim experience and returns on investment combined together. The extra amount coming from extra asset valuation is what creates the bonus.
An Illustration of How is Bonus Calculated
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 will be ₹50,000. The bonus rate depends on several factors, such as return on company assets, bonuses declared in the previous year, claims filed, expected interest rates in the future, and several other estimates.
It is significant to highlight that only owners of participating life insurance policies are eligible for bonuses. This applies to traditional plans such as endowment or money-back plans. Even such plans, however, might occasionally forego the bonus to provide a guaranteed boost to the insured, mentioned explicitly at the time of buying. When buying a life insurance plan, carefully review the policy documentation and verify the benefits provided by the insurer, including any bonuses, if any.
Types of Bonuses and Methods of Calculation
There are various types of bonuses in insurance that act as incentives for both policyholders and agents. The types include:
Simple Reversionary Bonus
Interim Bonus
Compound Reversionary Bonus
Know more about Bonus types in detail.
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