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All you need to Know about Bonus in Life Insurance

Life insurance provides financial coverage for the individual in case of death or disability. There is compensation given to the pension employees after their retirement. One of the best things about life insurance is that it provides insurance to the insured family even after their death.

The insurer pays a sum amount of money while going through life insurance policies, or the individual makes periodic payments to the insurer. These are known as Premiums. In exchange, the insurer promises to pay a certain amount of money at the time of maturity of the insurance policy or to their families in the event of death or disability.

Types of Life Insurance

Here are the different types of life insurance policies:

Term Life Insurance

Term Insurance is the basic type of insurance covering the amount of an insured person for a specific period where the insured's person gets a certain amount of money if there are any casualties. It is one of the best Life Insurance.

Whole Life Insurance

Whole Life Insurance covers the insured's money for a lifetime. This also includes a bonus where an individual is entitled to get such an amount. The insured's family also receives a valid amount of money for a certain period with the term policy. It is one of the best Life Insurance types.

Money-back Policy

A money-back policy is a different type of life insurance where an individual receives a balanced amount of money after the expiry of the term when maturity proceeds. With this type of insurance, the insured's family receives money in case of death during the policy period. It is one of the best Life Insurance types.

Bonus in Life Insurance

The bonuses in life insurance include a payout that an individual or the insured person will receive through some of the insurance policies. The insurer allocates a share in their profits in the form of a bonus to the investors or the policyholders.

The individual receives the payout after the basic sum assured that he is entitled to. A bonus is given to the individual if there are any casualties or disasters at the occurrence of a particular event. The amount is paid by the insurer to the policyholder each year under the plan.

How is Bonus Paid?

The bonus is generally paid after the death of an individual or after the maturity period ended for that particular year of the policyholder. Some of the insurance policies allocate the sum as the share of profits to the policyholders. The payout is received in addition to the entitlement of basic sum assured to the individuals.

The money paid for the maturity period gives a bonus to the policyholder in the form of the extra sum, which is added to the accumulated amount paid every year.

The bonus will be paid from the first year, which is credited into the policyholder's account, which ends at the maturity period. If there are any casualties or death, the bonus will be paid to the insured family members.

How is Bonus Calculated?

The bonus for an insurance company is calculated using the premium amounts of all the policyholders kept in a corpus fund. This is required for settling the claims of the policyholders. These are calculated on the sum assured and not on the premium paid. These cannot be compared to other kinds of returns at all. The bonuses are declared by the insurers, which is simple. This means that the insurer does not provide any compounding feature on the bonuses you have earned to calculate the payout.

Types of Bonuses in Life Insurance

The following are the different types of bonuses offered under life insurance plans:

Simple Reversionary Bonus

Simple Reversionary Bonus is the simplest of the bonus types, calculated on the sum that is assured. It is declared annually where the bonus amount is paid at the policy term’s end.

Compound Reversionary Bonus

Compound Reversionary Bonus is a type of bonus where the declared percentage in the assured sum is compounded with the previously accrued bonus. The bonus will be payable on the maturity or at the death of the policyholder.

Cash Bonus

A cash Bonus is a type of bonus where the amount is paid once a year. Here, the policyholder receives a bonus each year till the end of the Policy.

Terminal Bonus

Terminal Bonus is a type of one-time bonus. It is added to the maturity value of the Policy at the time of maturity or claim. This is paid according to the insurer’s policies that run on the full term.

Interim Bonus

An interim Bonus is a type of bonus that is delayed in the middle of a financial year due to maturity or a claim. Here, the insurer pays an interim bonus to the policyholders.

Policies Qualify for a Bonus

The policies which qualify for the bonus are returns in profit policies which may not depend on bonuses. Still, instead, these types of policies, there is a guaranteed addition (GA) to the Policy. It is an assured addition to the policyholders, whereas the bonus is unknown and Dorian in the insurer's profits.

The policies that qualify for a bonus are traditional insurance plans such as endowment or money-back plans. These can also be participatory plans which are also known as with-profit plans. The non-participatory plans do not qualify for bonuses which are referred to as 'without profits.' It's important to understand that these non-participatory policies have a lower premium when compared to participatory plans.

Bonus Declaration

The bonus declaration is based on the actual experience of the with-profit fund where the insurer declares the rates of bonus for the previous financial year, which is arrear. The surplus depends mainly on the amount of investment income earned, while other factors such as mortality and expenses also play a huge part in it. The interest rates in the future plan play a significant role while declaring the bonus amount.

Final Verdict

Many life insurances provide bonuses and offers which can be used effectively for future purposes. The available bonus is calculated according to the lump sum amount paid by the insured person during the maturity period. There are different types of plans available where you can get access to their terms and conditions and invest for a better future.

Disclaimer: Paisawiki does not endorse, rate, or recommend any particular insurer or insurance product offered by an insurer.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C apply.

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