Personal Finance

What is insurance bonus

Bavadharini KS BL Research Bureau | Updated on June 12, 2021

A benefit for long-term investments

Two neighbours’ daily routine of watering plants leads to an interesting conversation.

Sindu: This mint family plant took only about three weeks to grow and it smells good.

Bindu: That is a sage plant. Not only is it aromatic, but it has medicinal qualities too.

Sindu: Great. That’s a bonus! Just what we need during these tough times.

Bindu: Speaking of bonus, my life insurance policy matured and I got extra cash as bonus.

Sindu: That explains your extra plants on the walls. But what is a bonus in life insurance?

Bindu: Well, ‘bonus’ in insurance is a benefit given by the insurer to a policyholder over and above the maturity amount of the policy. So when a life insurer makes profit, it is distributed in the form of bonus.

Sindu: Does every life insurance product offer bonus?

Bindu: No. Bonuses are usually offered with traditional products, that is, ‘with profit’ policies.

Sindu: How many types of bonuses are there?

Bindu: There are broadly three types - terminal, interim and reversionary bonus. Terminal bonus is a one-time benefit offered by an insurer when the policy matures, though it is left to the discretion of the insurer to pay this. Interim bonus is declared in cases where an insurance policy matures before the end of the financial year or in case of the insured person’s demise during the term of the policy. In case of reversionary bonus, a certain bonus value is added regularly to the policy. These bonus amounts continue to accrue until the policy term and are paid out at maturity. After declaring reversionary bonuses, if there are still residual profits available with the insurer, they normally are declared as terminal bonus.

Sindu: Do we know how much will be the bonus at the time of taking the policy?

Bindu: Not always, though there are products that do mention the bonus at the inception itself. Bonus is declared either as a certain amount (say ₹20 or ₹50) per ₹1,000 sum assured or as a percentage of the sum assured. As bonus is declared only when an insurer make a profit, it may not be known at the inception of the policy.

Sindu: Can I purchase a policy based on the bonus payment?

Bindu: You can. While you can check the historical bonus paid by an insurer on their websites, that shouldn’t be the only criteria for selection.

Sindu: Bonuses are a reward for staying invested for long-term.

Published on June 12, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor