Types of Bonuses in Life Insurance

The bonus payments and sum depends on the structure of the Insurace plan. Let’s understand the different types of bonuses in life insurance

Bonus is an extra sum received over and above the principal value. A bonus in life insurance is the sum of money accrued by a policyholder over a period of time. This amount builds up along with the policy over the years on annual basis.

This bonus is paid in case of the demise or surrender of policyholder or at maturity whichever happens first. It is important to note here that the bonus is paid beyond the other applicable benefits under the life insurance policy as an additional benefit.

Depending on the plan structure, these payouts fall under the different types of bonuses in a life insurance policy.

When you buy a life insurance policy, the money that you pay as your premium, becomes part of the insurer’s overall funds. Most of this money is invested by the company in safe government instruments, with a lesser portion of the money invested in equities.

The revenue that these investments generate is combined with the funds that the insurer has left after paying out claims. This leads to the generation of a surplus, which is distributed to the policyholders as bonuses.

Furthermore, if the insurer’s assets are higher than its liabilities in a particular year, the additional surplus is also paid out as a bonus, forming part of the types of bonuses in life insurance.

It is important to understand that the bonus benefits are not applicable to all type life insurance policies. Only participating, also referred to as with-profit, policies are eligible to receive bonus payouts.

Generally endowment plan, Whole Life Insurance, and Money-Back policies fall under this ambit. While term insurance plans and ULIP plans(unit-linked insurance plans) are not eligible for bonuses as they do not include profit-sharing.

The size of the bonus is not set, and it depends on the performance of the investment assets and the total financial performance of the insurance company. These dividends are included in the various types of bonuses in a life insurance policy.

The insurer decides the bonus rates, and as per regulations, a major share of the surplus, typically 90%, is distributed to policyholders, while the remaining portion is retained for shareholders. The calculation of bonus amount happens towards the end of the financial year basis surplus.

The bonus payments and sum depends on the structure of the Insurace plan. Let’s understand the different types of bonuses in life insurance

The method used to calculate bonuses varies based on the insurer and the specific policy terms. These calculations apply across different types of bonuses in life insurance, with insurers generally following the approaches outlined below

The benefits available under applicable bonuses can be different in nature depending on the policies. Let’s briefly understand the benefits of bonuses in life insurance