How will you benefit from investing early in mutual funds?

In the simplest of terms, bonus refers to an extra amount of money one receives in addition to a base amount. The same concept is applicable to life insurance plans. Some life insurance policies allocate a share of their profits as a bonus. It is a payout one receives in addition to the basic sum assured and can be either paid out on policy maturity or upon the death of the insured, based on your policy terms. “Bonus is an important part of an insurance policy. But all life insurance policies are not entitled to receive the bonus amount. Only traditional participating policies that fall under the ‘with profit’ category such as whole life, money-back, or endowment plans are eligible for the bonus,” said Debasis Dutta, senior LIC agent belonging to the Million Dollar Roundtable.

Dutta said non-profit policies are not eligible for bonus. “The bonus amount is also not fixed and varies,” he added.

Types of bonuses

There are different types of bonuses offered by insurance companies with a participating life insurance policy.

Here’s a look:

1. Simple reversionary bonus

A reversionary bonus adds value to the total amount payable to the policyholder or nominee. This type of bonus is calculated only on the sum and declared annually. The accrued amount is paid at the end of the policy term or when a claim is filed.

2. Compound reversionary bonus

The bonus is a declared percentage on the assured sum and is compounded with the previously accrued bonuses. In this way the bonus payable increases year by year. The compound reversionary bonus is also payable upon maturity or death of the policyholder.

3. Interim bonus

Usually, bonus declaration is to be done by the end of a financial year. However, in instances where the death of the insured, or policy maturity, happens before that, the life insurance company declares an interim bonus. The initiative ensures that policyholders, or their beneficiaries, are not deprived of the extra pay out resulting from the short duration between the bonus declaration date and policy claim/maturity date.

4. Cash bonus:

An insurance company might decide to pay out the bonus accrued in cash to its policyholders. This bonus is payable on a yearly basis rather than at maturity.

5. Terminal Bonus: 

This is a one-time bonus added only at the time of maturity or claim. It is paid as per the insurers’ discretion for policies that have run their full term. Relinquished policies or those that have acquired paid-up value do not qualify.