Bonuses & other monetary benefits that you receive in your life insurance policies:
In a typical life insurance policy, you pay premiums to insurance company and in return the insurance company gives you an assurance that if your death happens within the policy term then your family will receive compensation as “Death Benefit” for your early death. If you survive the policy term you will receive compensation to cover the risk of dying too late as “survival benefit”. In any case compensation received from life insurance policy has 2 components:
- Sum assured
So what is Sum assured?
Sum assured is guaranteed component i.e the insurance company guarantees that it will give sum assured if death happens within the policy term or if you survive the policy term as the case may be.
Basically, the company collects premiums from all policy holders and from that fund it pays out sum assured to only those policy holders that happen to die within the policy term. So this is how company arranges fund to pay out sum assured in case of early death of policy holder.
Now lets see how company generates bonuses for its policy holders:
The insurance company creates reserves for giving bonuses in 2 ways:
- Firstly, if actual claims are less than expected claims it will result in creation of surplus reserves. For example, if company expected 10000 claims in a year and actual claims were only 8000 then there will some surplus reserves with the company.
- Secondly the company invests the funds created by accumulating all premiums to generate return on investment that gets added to its reserves.
Out of these reserves, insurance company retains part of the reserves (let say 5%) and distributes remaining reserves (say 95%) in form of bonuses to the policy holder.
So as seen – unlike sum assured, bonuses are not guaranteed but depend on performance of the company and how much reserves they have
Accordingly following are the different types of bonuses that you can expect from your life insurance policy
- Simple revisionary bonus:
In simple revisionary bonus, a bonus gets attached to your policy every year. Let say Rs 25000 is the bonus that gets attached to your policy every year. As it is recurring in nature it is called as “Revisionary bonus”. Also, important point is – even though Rs 25000 is getting attached to your policy every year it is not paid out every year – rather it keeps accumulating and is paid out on maturity or death as the case may be. So if Rs 25000 is the bonus getting attached every year in a 10 year policy, total revisionary bonus that you will get on maturity will be Rs 25000 x 10 years = Rs 250000
Note that even though Rs 25000 is getting attached every year you don’t receive interest on the attached bonus till the time it is paid out – in other words it follows principal of “Simple interest” and hence it is called as “Simple Revisionary bonus”
- Compound revisionary bonus:
Works just like simple revisionary bonus but only difference being you also get interest on Rs 25000 that is getting attached to your policy every year till the time it is paid out . So if we assume 5% p.a interest rate then on maturity the accumulated bonus as compound revisionary bonus will be Rs 314447.31.
- Terminal Bonus:
Unlike revisionary bonus which is recurring in nature a terminal bonus is onetime bonus – a Lump sum amount that gets attached to the policy right at the time of maturity.
So, if Rs 100000 is the terminal bonus that is getting attached to the policy in the end and in addition to that you receive Rs 25000 as simple revisionary bonus every year in 10-year policy, Total bonus paid out on maturity will be Rs 350000.
Terminal bonus is also called as “loyalty additions” because it is given as a reward to the policy holder for staying loyal to the policy & continuing the policy right till the end.
- Interim Bonus:
Sometimes the death of policy holder or maturity of the policy happens In between two bonus declaration date. Bonuses are usually declared at the end of the year but as death or maturity is happening between 2 bonus declaration date, your policy is not in force for entire year but only for part of the year – called interim period. So, you will not receive bonus for entire year but only for interim period in that year.
For example, if Rs 25000 is the bonus for the whole year expected to be declared at the end of the year but your policy is in force only for interim period of 6 months then your policy will get Rs 12500 as interim bonus for 6 months (i.e calculated on pro – rata basis).
So finally, we have seen that there are two types of compensation that you receive from a typical life insurance policy:
- Sum assured &
So, if the death of the policy holder happens within the policy term, death benefit will be paid out which will be “Sum assured + Bonuses accumulated till the time of death”
If the death of the policy holder doesn’t happen within the policy term i.e he survives the policy term, he will receive survival benefit or maturity benefit which will again be “Sum assured + accumulated bonuses till maturity”
So, these are the Bonuses and other monetary benefits that you receive from your life insurance policy.