Making sense of bonuses and guaranteed additions

  • Life Insurance


Everyone loves a little extra something, isn't it? An extra discount on a premium purchase. Or an added perk at work. An unexpected bonus to your paycheck. Or even just an extra helping of your favorite food.

All these things are guaranteed to bring a smile on your face.

Now, wouldn't you like it if your life insurance provider decided to offer you a little extra something? Sure you would!

Interestingly, most life insurance policies do offer an extra benefit, either in the form of a bonus or as guaranteed additions. Unfortunately, many interested insurance shoppers have no idea what these are, or think they're pretty much the same, and make hasty, uninformed purchase decisions.

Not you, though, because we're here to help you make sense of bonuses and guaranteed additions.

What is a bonus in a life insurance policy?

When you buy a life insurance policy, you pay your insurance provider premiums in exchange for the life cover, isn't it? Like you, all policyholders pay their premiums to the insurer. All these funds collected as premiums form the insurer's asset pool. It's this money that insurers use to settle the claims they receive. But claims aren't raised every day. So, instead of letting these funds sit idle, insurers invest the premiums collected in a variety of assets like bonds, securities, other debt instruments, and occasionally, a little bit in equity.

With time, these investments generate profits for the insurer. These profits are distributed to eligible policyholders as bonuses at the end of each financial year. Bonuses are typically paid out on participating life insurance plans, and they are not 'guaranteed.'

How are bonuses calculated?

The exact manner of bonus calculation depends on the insurance provider as well as the individual policy that you are planning to purchase. Broadly speaking, however, there are two common ways in which bonuses are generally calculated. Check them out here.

  • As a percentage of the sum assured
    Here, the bonus is computed as a percentage of the sum assured. For instance, if your policy states that bonuses will be accrued at the rate of 2% of the sum assured, and if the sum assured is Rs. 20 lakhs, the bonus will work out to be Rs. 40,000 (i.e. 2% of Rs. 20 lakhs.
  • As a certain amount per Rs. 1,000 of the sum assured
    Sometimes, bonuses are calculated as a certain amount for each Rs. 1,000 of the sum assured. So, if your policy comes with a sum assured of Rs. 20 lakhs, and if the bonus is calculated as Rs. 20 for each Rs. 1,000 in your policy, the bonus would come up to Rs. 40,000 (i.e. Rs. 20 x (Rs. 20 lakhs ÷ Rs. 1,000).

What are the different types of bonuses available?

Life insurance providers offer different types of bonuses to policyholders. You may have even come across some of these types previously. But if you didn't quite understand what they meant, worry not. Today, we'll decode the 5 common types of bonuses available in the insurance market.

  • Simple reversionary bonus
    This type of bonus is generally declared at the end of each financial year. However, it is not paid out right away. Instead, it is added to the policy each year, and paid out with the maturity or death claim.

    For example, say your policy offers a simple reversionary bonus at the rate of 5% of the sum assured. Now, if the sum assured is Rs. 5 lakh, you will be eligible for a bonus of Rs. 25,000 each year.

    The ABSLI Vision LifeIncome Plan is one example of a life insurance plan that pays you a simple reversionary bonus. This bonus is added to the policy each financial year.

  • Compound reversionary bonus
    A compound reversionary bonus is a lot like a simple reversionary bonus, except for one key difference. The percentage is applied not just on the sum assured, but also on the previously accrued bonus. So, this is something like compound interest. Here's an illustrative example to give you some more clarity on this.

    Say you have a life insurance policy that offers a sum assured of Rs. 5 lakhs. The compound reversionary bonus is offered at the rate of 5%. So, here's how the bonus will be calculated each year

    Financial year

    Amount on which bonus is calculated

    Bonus amount

    Year 1

    Rs. 5,00,000

    Rs. 25,000

    Year 2

    Rs. 5,25,000

    (Rs. 5,00,000 + Rs. 25,000)

    Rs. 26,250

    (5% of Rs. 5,25,000)

  • Cash bonus
    Who doesn't like some extra cash in hand, right? And that is exactly what a cash bonus is. Unlike reversionary bonuses, these cash bonuses are not accrued on a yearly basis till a maturity or a death claim. Instead, they are paid out as cash to the policyholder at the end of a financial year.

  • Interim bonus
    As you saw earlier, reversionary bonuses are accrued at the end of each financial year. However, what happens if a policyholder raises a claim in-between? For example, say your policy matures on October 31, 2025. You would have earned your last reversionary bonus at the end of the financial year 2024-25.

    But what about the 7 months since then, from April 1, 2025 to October 31, 2025? Here's where an interim bonus becomes relevant.

    In case a claim is raised in-between two successive bonus declaration dates, insurers calculate the interim bonus for the period from the last bonus date. This is to ensure that policyholders or their nominees do not miss out on the benefits due.

  • Terminal bonus
    A terminal bonus, as the name indicates, is paid out at the end of the policy term. It is a one-time benefit, and it is paid out as a kind of reward for persisting with the policy till its maturity. That's why it is also known as 'persistency bonus.'

    Since it is only paid at the end of the policy term, you will generally not be eligible for the terminal bonus if you surrender your policy in advance. However, some life insurance plans may also offer a terminal bonus on surrender, subject to certain conditions.

    For instance, the ABSLI Vision LifeIncome Plus Plan offers a terminal bonus on surrender, maturity or death, whichever occurs first, subject to the following conditions:

    • The first 5 policy years have been completed
    • All due premiums have been paid
    • The policy is still in force

What are guaranteed additions (GAs) in a life insurance policy?

Alright then, we've extensively discussed all about bonuses. But there's another kind of added benefit that life insurance plans can offer. And those are guaranteed additions. As the name indicates, these additions are 'guaranteed.' So, you can rest assured that by the time your policy matures, your corpus will see a significant boost, thanks to these guaranteed additions.

Unlike bonuses, these guaranteed additions are not dependent on the profits of the insurance company. And they are paid out on non-participating plans instead.

How are guaranteed additions calculated?

The exact manner of calculating guaranteed additions will vary from one life insurance plan to another. For example, take the case of the ABSLI Guaranteed Milestone Plan. This plan offers guaranteed additions that accrue on a monthly basis, boosting the corpus each policy month till maturity.

The amount of guaranteed additions each year are determined based on the following factors:

  • The premium amount that you have to pay
  • The premium band
  • The sum assured
  • The entry age of the insured person
  • The policy term

A policy that offers bonuses or a policy that offers guaranteed additions: Which one should you choose?

This depends entirely on what you are looking for from your policy. If you are a conservative investor and prefer to have guaranteed benefits, then a policy with guaranteed additions may be better for you. It also comes with lower premiums.

However, if you are okay with taking on a bit of uncertainty in return for higher benefits, a policy with bonuses could be better for your portfolio. Keep in mind that the premiums will be higher though, since you get to participate in the profits of the insurance company.

Summing up: The key differences between bonuses and guaranteed additions

So, from the detailed explanations you saw above, you may now have a fair idea of what bonuses and guaranteed additions are. Let's quickly summarize the differences between the two, so you can get more clarity on how they vary from one another.



Guaranteed Additions

Element of assurance

These are not guaranteed to the policyholder

These are guaranteed payouts

Type of plans

Bonuses are paid in participating plans only

Guaranteed additions can be made in participating or non-participating plans

Profit dependency

Bonuses depend on the profit of the insurance company

Guaranteed additions are independent of the insurer's profits

Element of certainty

Bonus amounts are not precisely known at the time of policy purchase

GAs are disclosed to the policyholder at the time of policy purchase

Premium rates

Policies that pay out bonuses may come with comparatively higher premiums

GAs are generally provided by non-participating plans, which come at an affordable premium


Now that you have a better idea of bonuses and guaranteed additions, you may want to purchase a savings plan to meet the dual goals of insurance and savings. Want to know more about how you can make the most of savings plans? We have a blog that can help you out.

Read it here


Not only does the ABSLI Guaranteed Milestone Plan give you guaranteed benefits on maturity, it also gives you guaranteed additions. Talk about a nice boost to your corpus!

The best part? These guaranteed additions happen each month, till the policy's maturity.

And the only thing you need to do to enjoy this benefit is pay your premiums on time. How simple, right?

Know More

ABSLI Vision LifeIncome Plus Plan (UIN: 109N131V01) is a non-linked participating individual life insurance savings plan. GST and any other applicable taxes will be added (extra) to Your premium and levied as per extant tax laws. An extra premium may be charged as per our then existing underwriting guidelines for substandard lives, smokers or people having hazardous occupations etc.
ABSLI Guaranteed Milestone Plan (UIN: 109N106V10) is a non-participating traditional insurance plan. All terms & conditions are guaranteed throughout the policy term. GST and any other applicable taxes will be added (extra) to your premium and levied as per extant tax laws. An extra premium may be charged as per our then existing underwriting guidelines for sub-standard lives, smokers or people having hazardous occupations etc. The insurance cover for the life insured (including minors) will commence on the policy issue date.


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