Good, you have taken a right decision to but Life Insurance. You have been shown illustration and attractive figures with promises that you will receive sum assured plus accrued and loyalty bonus on maturity. This amount would help you in meeting your financial goals.
You thought a lot and believed on promises but did you ask questions:
Frequently ask questions (Faqs) about Bonus in Insurance Policy:
- What is a Bonus?
- Why would Insurance Company declare Bonus?
- Is Bonus like dividend announced?
- When will be the bonus distributed?
So Insurance Samadhan has tried to give answers to your questions related to bonus in Insurance Coverage:
- Types of Insurances: There are two broad categories of Insurance (1) Participative (2) Non Participative
In Participative Policies, policy holder is like shareholder and partners with the income of Insurance Companies. This income is generated through returns on investment of Life Fund and Mortality Experience of Insurance Company. Each premium of a plan has three elements i.e EMI. E means Budget for expense, M means budget for mortality contribution depending on age and mortality table and I stand for money for Investment. So Insurance company budgets for each three cost centres and and creates a valuation surplus. This surplus is distributed as Bonus.
In non-participating policies, policyholders do not participate with valuation surplus. Term and ULIP policies fall under Non Participative Policies.
2. Types of Bonus: Insurance companies offer three type of Bonuses:
- Simple Reversionary: Let us say you have an Insurance with Sum assured of Rs 10 lakh, with premium of Rs 60000 per annum for 20 years. On anniversary of your policy you will be allotted a bonus of Rs 30 per 1000 of sum assured which means you will earn bonus of Rs 30000 calculated by 30 /1000 multiplied by Rs 1000000. You will be very happy to receive Rs 30000 on an investment of Rs 60000 i.e 50% return. But your nominee will get Rs 1030000 if you die and you will get Rs 30000 only on maturity. In between, if you terminate contract, you will have only surrender value of Rs 90000. This bonus is declared each year and keeps accruing with your policy. On maturity you will receive Rs 16 lakh i.e guaranteed sum assured of Rs 10 lakh plus bonus of Rs 30000 each year for 20 year under assumption that same bonus is given each year. LIC offers Simple Reversionary Bonus.
- Compound reversionary Bonus: It is offered like simple but with compounding benefit. Each year Sum assured also increase. So second year Bonus will be calculated on Rs 1030000 i.e 30/1000 multiplied by Rs 1030000 hence second year bonus will be Rs30900. Thus compound Reversionary Bonus accumulates better maturity value.
- Non reversionary Bonus: Unlike reversionary here you are allowed cash bonus which can be taken by you. This cash can be either taken or can be used to increase your sum assured. This can also be used to reduce your premium liability.
3. Loyalty or Terminal Bonus: All insurance companies awards persistent policy holders and give a loyalty bonus on maturity.
4. IRDA Regulations on Bonus declaration: IRDA ensures that 90% of valuation surplus is distributed to Policy Holders in the form of Bonus. IRDA also ensures that interim bonuses are paid to Policy Holders whose policies are maturing in mid-term when valuation surplus has not been calculated.
Hope this would clarify your concepts on Bonus and you will be able to ask questions to your advisor.
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