Types of Bonus in Life Insurance

Life insurance is not just a way of securing finances for unforeseen events; it is so much more. Providing the insured with an impressive growth on the premiums invested, life insurance also acts as an investment tool that helps you financially protect your future and save your funds from inflation.

However, apart from these wonderful features, some life insurance policies also provide bonus payments to the policyholders on a yearly basis beyond the basic sum assured they are entitled to. This additional amount can be either paid out on policy maturity or upon the death of the insured, based on your policy terms.

Let us learn about types of bonuses in life insurance deeply so that you can get an idea of when you are eligible for getting a bonus and when you can withdraw/receive it.

What Is a Bonus in Life Insurance?

The term “bonus” in life insurance refers to the additional amount which is offered to the insured when the insurance company earns good profits from its other revenue sources.

It is like a gift from the insurer’s side, which is payable to the policyholder based on the policy terms and conditions. However, the bonus accrued can be received by the policyholder on the maturity or surrender of the policy or the unfortunate demise of the insured (depending upon the terms and conditions of your chosen life insurance policy).

To understand the conditions in which a bonus is rewarded, you need to know the types of bonuses in life insurance.

How is Life Insurance Bonus generated?

The premiums paid by policyholders of a life insurance company become a part of its asset pool that is utilised for payment of claims in the future. A large portion of these funds is invested in debt instruments secured by the government while allocating little to equities.

The insurer’s claim experience and returns on investment together are responsible for profit, which it distributes as bonus payments at the end of the financial year. Any excess of assets after the company’s assets and liabilities are valued, may also generate an extra amount to be distributed as bonus.

Types of Bonuses in Life Insurance

There are different types of bonuses offered by life insurance companies. These are:

• Reversionary Bonus

This type of bonus is added to the sum insured at the policy anniversary. Below are the two categories of reversionary bonuses:

1. Simple Reversionary Bonus

This is the simplest type of bonus in life Insurance. It is accrued yearly and is paid when a death or surrender claim is raised by the policyholder or at policy maturity.

The simple reversionary bonus is declared in the form of a percentage i.e. per thousand of the sum insured.

The formula for calculating a simple reversionary bonus is:

Bonus= Bonus rate*(Sum insured/1000)

Let us take an example: Suppose your sum insured is ₹25,00,000, and the bonus rate is ₹40 per thousand; then your bonus amount will be ₹1,00,000.

2. Compound Reversionary Bonus

This bonus is also declared annually but it is not calculated only on the sum insured. The calculation method of this bonus is similar to the simple reversionary bonus, but it is calculated on a total of the sum insured and previously accrued bonuses.

The formula is as follows:

Bonus= Bonus rate*[(Sum insured+Accrued bonuses)/1000]

• Interim Bonus

Generally declared at the end of the financial year and credited in the ensuing financial year, the calculation of interim bonus is similar to reversionary bonus.

If a death or maturity claim arises on a policy between two policy anniversaries, an interim bonus will be added to the policy benefits. For a death claim, the Company is paying an interim bonus equal to one year’s reversionary bonus (RB) though the policy has not participated for the full year.

• Cash Bonus

A cash bonus is a regular bonus declared annually as a percentage of base sum assured or annualized premium depending upon the product terms and conditions. They accrue at the policy anniversary and are payable as per the product terms and conditions.

For example - If you have paid ₹1,00,000 as a premium in a year and the cash bonus rate of your life insurance policy is 5%, then you will get ₹5,000 as the bonus.

• Terminal Bonus in Insurance

This is additional bonus declared annually and payable on death, maturity or surrender, paid as a percentage of total accrued RBs and CBs paid, if any, or as a percentage of sum assured depending upon the product terms and conditions.

Conclusion

Due to the uncertainties of life, purchasing a life insurance policy for yourself, your kids, your spouse, and your parents has become the need of the hour.

With numerous benefits, such as financial security, tax benefits on Term Insurance, and, most importantly, different types of bonuses, life insurance is the best path to a financially secure future for both the insured and his family members.

Choosing PNB MetLife for buying a life insurance policy means getting a multitude of options to choose from. From family protection solutions to long-term savings plans, PNB MetLife offers a great investment opportunity along with providing security against unfortunate incidents.