When you think of a life insurance policy, you usually think of the financial protection it provides to your family. But there is an additional feature that many policyholders value deeply: the bonus. A bonus is not guaranteed, yet it can significantly increase the value of your policy over time. It is a way for a life insurance company to share part of its profits with you, rewarding you for choosing and maintaining a participating plan. Choosing the best term insurance company ensures not just reliable protection but also the potential to benefit from such valuable features.
The idea is simple. Insurers collect premiums and invest them in avenues like government securities and debt instruments. When these investments generate profits, the insurer may declare a bonus that gets credited to your policy. Over time, these bonuses accumulate and can become a substantial benefit, adding value beyond the assured sum.
How Bonuses Work in a Life Insurance Policy
Not all policies qualify for bonuses. They are available only on participating policies, often referred to as “with-profit” plans. Here, the policyholder shares in the profits earned by the insurer. The insurer determines the bonus rate by considering investment returns, claims paid during the year, and operating costs.
Once declared, a bonus is added to your policy and becomes payable at the time of maturity, surrender, or claim settlement. For long-term policies, this can make a significant difference to the eventual payout.
Types of Bonus in Life Insurance
Life insurance companies typically offer four to five types of bonuses. Understanding them will help you see how they contribute to the growth of your plan.
- Reversionary Bonus
Reversionary bonuses are declared annually and added to the sum assured of your life insurance policy. They are payable on maturity or death, not immediately. There are two main types:
- Simple Reversionary Bonus: Calculated as a percentage of the sum assured and declared every year. Once declared, it becomes part of your guaranteed benefits.
- Compound Reversionary Bonus: Works on the principle of compounding. Each year’s bonus is added to the sum assured, and subsequent bonuses are calculated on this new amount.
- Interim Bonus
There are times when a policy matures or a claim arises between two bonus declaration dates. In such cases, insurers credit an interim bonus to ensure fairness. This covers the gap until the next official declaration.
- Terminal Bonus
Also known as a persistency or final bonus, this is a reward for keeping your policy active until maturity. It is added once, at the end of the policy term, and is not available on early surrender.
- Cash Bonus
Some insurers offer bonuses in the form of direct cash payments instead of adding them to the sum assured. This option provides liquidity to policyholders who may need periodic returns rather than waiting until maturity.
Benefits of Bonuses in Life Insurance
Bonuses are not just technical add-ons. They create tangible advantages for policyholders:
- Higher Returns: A bonus directly increases the value of your life insurance policy, giving you more than the originally assured amount.
- Flexibility: Depending on the type, bonuses can either grow your coverage, be paid in cash, or accumulate for a larger payout.
- Reward for Discipline: Insurers often structure bonuses as rewards for keeping the policy active, which encourages disciplined long-term savings.
- Wealth Creation: Over the years, accumulated bonuses can turn your policy into a reliable tool for building wealth alongside protection.
Things to Keep in Mind
While bonuses are attractive, it is important to understand a few points:
- They are declared at the discretion of the insurer and depend on the company’s performance.
- The type of bonus applicable will be clearly mentioned in your policy document.
- Past bonus rates can provide an idea, but they do not guarantee future payouts.
- Staying consistent with premium payments is key to enjoying these benefits.
How to Use Your Bonus Wisely
Bonuses can be used in different ways, and the choice often depends on your financial goals:
- Add them to your coverage, which increases the protection your family receives.
- Let them accumulate, creating a larger maturity benefit.
- Opt for a cash bonus if you prefer liquidity to meet immediate needs.
Being clear about your priorities helps in making the most of this feature.
Final Word
A bonus in a life insurance policy is more than just an extra payout. It reflects the financial strength of the life insurance company and rewards you for staying committed to long-term planning. Over time, bonuses enhance protection, support wealth creation, and add a sense of reliability to your financial journey.
For those looking to secure their family while also enjoying potential additional benefits, a participating policy with bonus features can be an excellent choice. And when you begin this journey, Aviva India offers solutions that blend security, savings, and growth into one comprehensive package.
