Types of Bonuses Under Life Insurance Policy

Free goodies? Cashbacks on every purchase? Extra perks on the tickets you’ve bought? A bonus at work at the end of each year? Everyone loves a bit of extra stuff, right?

Similarly, life insurance plans also have something called bonuses. Insurance companies offer bonuses to you in addition to the policy benefits (death benefit/maturity benefit/survival benefit). Please note that not all policies offer bonuses.

So, which types of life insurance policies offer bonuses? What are the various life insurance policy bonus types? How are they calculated? How often do you receive them?

Let’s discuss!

Bonuses Are Based On The Type Of Policy You Choose

There are two types of life insurance policies in this case -

Participating Policy	Non-Participating Policy
As the name suggests, you participate in your insurance company’s profits. They share their profits with you in the form of bonuses. These bonuses are offered alongside maturity, survival, or death benefits. The bonus is based on profits earned by an insurance company from investments in bonds, securities, debt, and equity investments.	You do not participate in your insurance company’s profits, so it doesn't offer any bonus. It provides only guaranteed³ benefits.

So, if you choose a Participating Policy, you receive a bonus. If you choose a Non-Participating Policy, you do not.

What Exactly Is A Bonus?

As you already know, to keep the policy active, premiums must be paid on time. Every premium collected by the insurance company becomes a part of its assets. These funds are used to settle claims. There may not be claims every day, and in such a case, these amounts shall accumulate with the company. Instead of keeping these funds stagnant, they invest them in bonds, securities, and other debt and equity instruments.

These investments generate profits that are distributed to you as bonuses. A bonus is based on the insurance company, the policy type, and how long the policy has been in effect. Please note that the bonuses can vary from year to year depending on the company's profits.

How Are These Bonuses Calculated?

The calculation for bonuses may vary depending on the insurer and policy. These are the general methods for calculating bonuses -

• The bonus is equal to a certain percentage of the sum assured. Suppose your bonus is 5% of your sum assured for the policy you have taken. The chosen sum assured is Rs 20 lakhs. Bonus = 5% of 20 lakhs = Rs 1,00,000. Thus, you are entitled to receive a bonus of Rs 1,00,000.

• The bonus is equal to a certain amount per Rs. 1,000 of the sum assured. Suppose the sum assured in your plan is 25 lakhs. And, the bonus is calculated as Rs 35 per Rs 1,000 of the sum assured. Then, bonus = 35 x (25 lakhs ÷ 1000) = Rs 87,500. Hence, you are entitled to receive a bonus of Rs 87,500.

Types Of Bonuses In Life Insurance Plans

Life insurance plans generally offer these types of bonuses -

• Reversionary Bonus This won’t be given to you immediately but instead gets accumulated under the policy. You or your nominee will receive it either when the policy matures or when you pass away during the policy period. The reversionary bonus rate is calculated as a certain percentage of the sum assured. It is declared by the insurer.

Here is the formula:

Reversionary Bonus = Sum Assured x Reversionary Bonus Rate (declared by the insurance company) There are two types of Reversionary bonuses -

• Simple Reversionary Bonus
• Compound Reversionary Bonus

Let's discuss each of these bonuses in detail -

a. Simple Reversionary Bonus A Simple Reversionary Bonus can be calculated easily - as the name suggests. The reversionary bonus rate is calculated by multiplying the sum assured you choose when purchasing the policy by the reversionary bonus rate.

Example: Lekha has bought a participating endowment policy with a sum assured of Rs 25 lakhs. And, a simple reversionary bonus of 5% of the sum insured is available under the policy. Sum Assured = Rs. 25,00,000 Reversionary Bonus Rate = 5% Simple reversionary bonus = 5% of 25,00,000 = Rs. 1,25,000

Hence, Lekha will receive Rs. 1,25,000 every year with the maturity benefit or this amount shall be given to her nominee along with the death benefit.

b. Compound Reversionary Bonus Compound reversionary bonuses incorporate both the sum assured and the previous year's bonus into the reversionary bonus rate. Let's revisit Lekha's example and assume a 5% compound reversionary bonus is paid under the policy.

	Sum Assured	Bonus
1st Year	Rs 25,00,000	5% * 25,00,000 = Rs 1,25,000
2nd Year	25,00,000 +1,25,000 = Rs 26,25,000	5% * 26,25,000 = Rs 1,31,250
3rd Year	26,25,000 + 1,31,250 bonus = Rs 27,56,250	5% * 27,56,250 = Rs 1,37,812.5

And, so on. This cycle shall continue till the policy expires or in case you pass away during the policy period.

• Terminal Bonus
  Terminal bonuses are also known as persistency bonuses. The bonus is payable to you when the policy matures or to your nominee if you, unexpectedly, pass away while the policy is still active. The insurance company offers this bonus as a way of appreciating your timely premium payments. It is up to the insurer to decide whether or not to pay the bonus. This means that there is no assurance that you or your nominee will receive it.

• Interim Bonus
  Bonuses are typically announced at the end of the financial year. However, an interim bonus is given to you in case the policy matures or death happens between two consecutive bonus declaration dates. Based on the number of days remaining from the previous bonus date, this bonus is calculated. Insurers came up with this bonus to ensure that you or your nominee are able to enjoy the benefits entirely without missing out on anything.

Example: Suppose your whole life insurance policy expires on December 31, 2025. This means that you gained your last reversionary bonus in 2024-25. This interim bonus is based on the last nine months, i.e. April 1, 2030, through December 2025. The bonus accumulated during these 9 months will be paid to you.

• Cash Bonus As opposed to other bonuses, this bonus is paid to you each year at the end of every financial year in the form of cash. The bonus is calculated as a percentage of your annual premium and is paid annually. The formula for calculating it is as follows:

Cash Bonus = Annual Premium Amount x Cash Bonus Rate

Example: Dev buys a participating whole life policy with a sum assured of Rs. 30 lakhs. He needs to pay an annual premium of Rs. 20,000, and the cash bonus rate under his policy is 5%. So, how much cash bonus does he receive every year? Let's see -

Annual Premium Amount = 20,000/- Cash Bonus Rate = 5% Cash Bonus = 5% of 20,000 = Rs 1000

Hence, Dev will receive a cash bonus of Rs 1000 every financial year.

It is important to note that the bonuses mentioned in this article are those that are most commonly offered. Life insurance plans may, however, offer other types of bonuses as well.

Summing up!

We've learned what a life insurance plan's bonus is and how it is decided by the insurance company. The most common types of bonuses payable under a life insurance plan include – simple reversionary bonus, compound reversionary bonus, interim bonus, cash bonus, and terminal bonus. If you are planning on purchasing a life insurance policy, ensure you speak with your insurer regarding the bonuses, as they differ across products.