Do you know that you could earn bonus by investing in an insurance policy? In India, a majority of investors seek guaranteed returns on investments. A traditional life insurance policy is a sought after investment proposal as it offers some returns in the form of bonus in addition to life cover. Let us explore some aspects of this feature of life insurance.
Do all types of insurance polices offer bonus? No. Only holders of traditional participating insurance policies such as endowment policy or whole life insurance policy or money back plan are entitled to bonus. Typically, a traditional policy has two versions – participating and non-participating policies.
A key feature of a participating policy is that it will participate in the profit of the insurance pool i.e. it pays bonus to policy holders. The percentage of bonus that is paid is not fixed. The premium for a participating policy is higher than the non-participating policy for a similar coverage and the same customer criteria.
The next question is how insurers decide on bonus rate. The bonus declared annually depends on the amount of surplus in the insurance company’s life fund. This in turn depends on economic conditions and equity markets. If a life insurance company has good surplus year on year, it could pay a high rate of bonus.
However, if economic conditions are poor, insurance companies lower the bonus rate to reflect the actual investment returns in the life fund. The bonus rate is decided after considering several factors such as return on the underlying assets, the level of bonus declared in the previous years and other actuarial assumptions (especially future liabilities and anticipated investment returns), as well as marketing considerations.
Insurers usually offer five types of bonuses — simple reversionary bonus, compound reversionary bonus, terminal bonus, interim bonus and cash bonus.
Simple reversionary bonus is declared annually on the sum assured and the accrued amount is paid out to the policyholder at the time of claim or maturity. On the other hand, in compound reversionary the bonus of each year is added to the sum assured and the subsequent year’s bonus is calculated on the compounded sum. The final accrued bonus is payable in case of claim or maturity.
Terminal bonus or persistency bonus is paid to the policyholder based on the performance of a participating policy. Offered at the discretion of the insurer, this type of bonus is paid at the time of maturity or death of the life assured during the term of the policy. Terminal bonus is accrued every year depending on the profit made by the insurer and paid at the time of maturity or death claim settlement. Usually, terminal bonus gives a good sum of money and it is important for a customer to hold on to the policy till the end of the term to avail this bonus.
Interim bonus is paid for those life insurance policies that mature or in the event of death claim in between two bonus declaration dates. Simply put, if maturity of a policy or death claim happens before the bonus declaration date, bonus is paid on a pro-rata basis based on the interim bonus rate announced by the company against that particular policy.
Bonus can also be paid by the insurer in cash at the end of the year instead of accruing it year after year. Such bonus is referred to as cash bonus.
A policy buyer must check the type of bonus that different plans offer before deciding on a policy. This information can be confirmed through the plan brochure or after consulting with the insurance agent. Once the policy is purchased it is also important that a policyholder remain abreast with the bonus declaration against one or more participating policies throughout the term of the policy.
(The writer is MD and CEO, Bajaj Allianz Life Insurance)
