Introduction Most of the Indians, generally, go for conventional saving instruments. Their main intent is not to lose the principal amount of the savings that they are going to make and at the same time, they expect some returns on it. It is in this view, they purchase a life insurance policy as a savings instrument rather than as a protection instrument. Most of the people see the insurance cover that comes with a life insurance policy as an additional advantage on their savings. Even the insurance agents explain about the insurance policies in that manner. Whenever the agent explains about the policy, the first question people ask is, how much they will get at the end of the maturity period. They blindly follow the agent about the returns and start investing their money into the insurance policy. After that, they never bother about the returns, which they are going to get in terms of bonus.
Life insurance policies and bonus applicable Not all the life insurance policies provide you the bonus. Generally, there exists two types of insurance policies, one being the participating policy and the other being the non-participating policy. Only participating policies pay you the bonus. Insurance policies like endowment, whole life, money back policies, etc. come under such participating policies. Whenever the insurance company makes some profits on its investments, the participating policies will get their share from the profits as bonus. The amount of bonus, that each policy gets, depends on the policy period and the Sum Assured amount. The amount of insurance bonus is not fixed. It can vary depending on the amount of profits the insurance company makes. Insurance Regulatory and Development Authority (IRDA) specifies that 90 percent of the profits should be distributed to the policy holders as bonus. Since the participating insurance policies are providing bonus, the premium for such policies is somewhat higher when compared to non-participating policies.
Types of bonus in life insurance and their calculation While calculating the bonus, insurance companies will consider the profits of the current year and at the same time they will also look at the previous year bonus declaration and the history of claims that are made on different insurance policies. While estimating the bonus, insurance companies calculate bonus for each thousand rupees of Sum Assured amount. For example, if it declares Rs. 40 for each thousand rupees of Sum Assured amount, a Rs.5 lakh policy will receive Rs.20,000 as bonus for that year. Insurance companies generally provide following types of bonuses.
Simple reversionary bonus In this type of bonus distribution, the bonus amount is determined every year based on the Sum Assured amount. When a claim is made or when the policy matures, the sum total of bonuses accrued every year will be added to the Sum Assured amount and will be given to the policyholder.
Compound reversionary bonus In this type, every year the bonus is added to the Sum Assured amount and the total becomes the new Sum Assured amount for calculating the bonus. Bonus calculation is done in this manner until the policy matures or any claim is made on the policy in between.
Cash bonus In this type, the annual bonus is paid to the policy holder in the form of cash every year. So, the policy holder need not to wait until the maturity of the policy in order to get the bonus.
Interim bonus When any policy matures or any claim is made in between two successive bonus declaration dates, interim bonus is calculated for the remaining days from last allocated bonus date. That means, it is calculated for a partial year rather than for a complete year.
Final bonus Final bonus is declared for those policies, which attain maturity. That means, it is given at the end of the insurance policy period. It is provided simply for maintaining the policy until its maturity date. Distribution of final bonus completely depends on the discretion of the insurance company.
Conclusion Before you take any life insurance policy, look at the type of bonus that the insurance company is offering on that policy. It is also better to know how much bonus the company is offering for a given Sum Assured amount. If you are not able to find such details on your own, ask the insurance agent clearly or check out in the internet to know more about that particular insurance policy.
Hi, thanks for the information but need to know more about the calculation to arrive at the profit figure out of which 90% will be given to the policy holder.
Right at the introduction, I would like to emphasize that we should move away from treating life insurance as a savings tool. Life insurance should be a pure term policy and not a policy wherein the person should expect returns. If one is starting at an early age, one can go it for a pure term policy (nothing is paid back at the end) but the premiums would be lower when compared to the hybrid/variable money back policies.
Some first-time policy buyers would be misled or they would have understood that the bonus is guaranteed. It is not so, only the basic sum assured is reliable. At times if you ask what is the policy maturity value, you'll get a good figure but please ask what the break up is.
If you want to surrender the policy half way please remember to check what would be the loss incurred. At full maturity, sometimes a loyalty bonus is given at the end of maturity. This would be a small amount.