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Features
Ref. No. KLI/22-23/E-BB/492
Bonuses in life insurance are a portion of the insurer’s profits shared with policyholders who hold participating policies. The various bonus types in insurance, whether simple or compounded, accumulate over time, leading to a larger payout at maturity or in the event of a claim. Eligible policies, such as endowment, whole life, and money-back policies, offer these types of bonus in insurance as a reward for long-term commitment. When you buy a life insurance policy, the insurer agrees to pay your nominees a sum assured in the unfortunate event of your passing. The policy documents may also specify a certain amount that will be paid on the maturity of the policy. But in addition to such pre-decided amounts, you can also receive an extra sum if you buy a participating policy. This is termed as bonus and is paid in certain circumstances as per the policy terms.
A bonus in life insurance is a portion of the insurer’s profits distributed to policyholders who have purchased a participating policy. Unlike non-participating policies, where no profit-sharing occurs, participating policies allow policyholders to benefit from the insurer’s surplus earnings. The various types of bonuses in life insurance enhance the value of your policy and serve as a reward for long-term commitment to the plan.
It is essential to understand how many types of bonus in insurance are available in the market. You can then select the most suitable one according to your needs.
This is the most common types of bonus in insurance. It is declared annually by the insurer and added to the policy’s sum assured. It is paid out when the policy matures or when the policyholder’s family claims it in the event of death. Reversionary bonuses are further divided into two types:
A simple reversionary bonus is calculated as a fixed percentage of the sum assured and accumulates every year. For instance, if your sum assured is ₹20 lakhs and the declared bonus rate is 2%, your sum assured increases by ₹40,000 each year, leading to a steady boost in the final payout.
As the name suggests, this bonus is calculated on both the sum assured and previously accumulated bonuses. In the example above, if the compound reversionary bonus rate is 2%, the bonus for the second year would be 2% of ₹20,40,000 (sum assured plus the first-year bonus). This creates a compounding effect that significantly increases the policy value over time.
Interim bonuses are declared to cover the period between the last bonus declaration and the claim or maturity date. If you surrender your policy or if it matures mid-year, the interim bonus ensures you receive a pro-rata share of the bonus for the elapsed period. For example, if your policy is terminated in September after the last bonus was declared in April, you will receive an interim bonus for the April to September period.
A cash bonus allows policyholders to receive their bonus in cash each year rather than accumulating it with the sum assured. This is beneficial for those seeking regular returns. For example, instead of waiting for the policy term to end, you can opt for an annual cash payout based on the declared bonus rate.
Also known as a loyalty bonus, the terminal bonus is a one-time payout at the end of the policy term. It rewards long-term policyholders who maintain their policy until maturity. This bonus reflects the policyholder’s commitment over many years.
The different types of bonus in insurance are calculated based on the insurer’s profits and the policyholder’s sum assured. Mostly, these bonuses are declared annually and depend on the performance of the insurance company. The amount allocated as a bonus is expressed as a percentage of the sum assured or as a per-thousand-rupees figure.
For instance, if your sum assured is ₹10,00,000 and the declared bonus is ₹50 per ₹1,000, your bonus for that year would be ₹50,000. The method of calculation varies depending on the type of policy. Bonuses can either be compounded or simple, impacting the final payout.
Life insurance companies invest the premiums they collect in safe and high-return financial instruments such as government securities, corporate bonds, or equities. The profits from these investments form a surplus, and a portion of this is distributed among policyholders in the form of bonuses. The types of bonus in insurance are generated from the insurer’s surplus profits after deducting operating expenses, claims, and reserves.
The types of bonus in insurance discussed in the previous sections are applicable to participating policies, often referred to as “with-profits” policies. These include:
A bonus in life insurance is a portion of the insurer’s profits distributed to policyholders who have purchased a participating policy. Unlike non-participating policies, where no profit-sharing occurs, participating policies allow policyholders to benefit from the insurer’s surplus earnings. The various types of bonuses in life insurance enhance the value of your policy and serve as a reward for long-term commitment to the plan.
It is essential to understand how many types of bonus in insurance are available in the market. You can then select the most suitable one according to your needs.
This is the most common types of bonus in insurance. It is declared annually by the insurer and added to the policy’s sum assured. It is paid out when the policy matures or when the policyholder’s family claims it in the event of death. Reversionary bonuses are further divided into two types:
A simple reversionary bonus is calculated as a fixed percentage of the sum assured and accumulates every year. For instance, if your sum assured is ₹20 lakhs and the declared bonus rate is 2%, your sum assured increases by ₹40,000 each year, leading to a steady boost in the final payout.
As the name suggests, this bonus is calculated on both the sum assured and previously accumulated bonuses. In the example above, if the compound reversionary bonus rate is 2%, the bonus for the second year would be 2% of ₹20,40,000 (sum assured plus the first-year bonus). This creates a compounding effect that significantly increases the policy value over time.
Interim bonuses are declared to cover the period between the last bonus declaration and the claim or maturity date. If you surrender your policy or if it matures mid-year, the interim bonus ensures you receive a pro-rata share of the bonus for the elapsed period. For example, if your policy is terminated in September after the last bonus was declared in April, you will receive an interim bonus for the April to September period.
A cash bonus allows policyholders to receive their bonus in cash each year rather than accumulating it with the sum assured. This is beneficial for those seeking regular returns. For example, instead of waiting for the policy term to end, you can opt for an annual cash payout based on the declared bonus rate.
Also known as a loyalty bonus, the terminal bonus is a one-time payout at the end of the policy term. It rewards long-term policyholders who maintain their policy until maturity. This bonus reflects the policyholder’s commitment over many years.
The different types of bonus in insurance are calculated based on the insurer’s profits and the policyholder’s sum assured. Mostly, these bonuses are declared annually and depend on the performance of the insurance company. The amount allocated as a bonus is expressed as a percentage of the sum assured or as a per-thousand-rupees figure.
For instance, if your sum assured is ₹10,00,000 and the declared bonus is ₹50 per ₹1,000, your bonus for that year would be ₹50,000. The method of calculation varies depending on the type of policy. Bonuses can either be compounded or simple, impacting the final payout.
Life insurance companies invest the premiums they collect in safe and high-return financial instruments such as government securities, corporate bonds, or equities. The profits from these investments form a surplus, and a portion of this is distributed among policyholders in the form of bonuses. The types of bonus in insurance are generated from the insurer’s surplus profits after deducting operating expenses, claims, and reserves.
The types of bonus in insurance discussed in the previous sections are applicable to participating policies, often referred to as “with-profits” policies. These include:
Non-participating policies, such as term insurance, are not eligible for bonuses as they do not share in the insurer’s profits.
When claiming types of bonus in insurance, it is crucial to understand various factors that influence your benefits and ensure you maximize the returns from your policy. Below are key points to keep in mind:
When deciding between the different types of bonus in insurance, you should also check the company’s past track record and their Claim Settlement Ratio. Take time each year to review how your bonuses are building up and whether they match your financial needs. For example, you might want to switch from terminal bonuses to cash bonuses if your financial situation changes. Do not hesitate to ask your insurance advisor about different bonus options, as making small changes to how you receive bonuses can make a big difference to your long-term financial security.
1
No, insurance bonuses are not always calculated annually. Some insurance policies may declare bonuses every few years, depending on the policy terms and the insurer’s performance.
2
Guaranteed returns plans generally do not offer bonuses as the returns are fixed. However, some policies may include additional benefits like bonuses based on the insurer’s performance, though these are not guaranteed.
3
Bonuses are usually paid when the policy matures or at the end of each policy year, depending on the terms of the insurance contract. In some cases, bonuses may be paid as a lump sum or added to the policy’s cash value.
4
Bonuses are not always declared every year. It depends on the insurer’s financial performance and the type of policy. Some policies may declare bonuses annually, while others may do so less frequently.
5
There are different types of bonus in insurance: reversionary bonuses, cash bonuses, interim bonuses, and terminal bonuses. Reversionary bonus is further categorized into simple or compound bonuses. Each serves a different purpose and is applied at different stages of the policy.
6
A reversionary bonus is an addition to the policy’s sum assured, declared annually by the insurance company. It is payable upon policy maturity or the death of the policyholder.
6
The premium and bonus amounts for life insurance depend on the policy type, sum assured, and the insurer’s financial performance. Bonuses are generally a percentage of the sum assured or premiums paid.
6
Yes, a bonus in life insurance can be beneficial as it enhances the policy’s value, increasing the maturity amount or death benefit. Bonuses are often considered an additional reward for policyholders.
6
A terminal bonus is a lump sum paid at the time of policy maturity or death, reflecting the insurer’s performance over time. Reversionary bonuses are declared periodically and are added to the policy’s value, to be paid out on maturity or death.
Features
Ref. No. KLI/22-23/E-BB/2435
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
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