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Many of us take a life insurance policy because it offers guaranteed returns. Some part of the returns comes from bonuses declared by the insurance companies.  This article explains What is the bonus?Who gets the bonus? What are different types of bonus?How are they generated? When is bonus paid? What happens to bonus if I surrender my policy or make it paid up?How to find about bonus for my policy?

What is Bonus?

When Life Insurance companies make profits and share the profits with their policyholders they do so by calling it a Bonus.

Does every policy holder of life insurance gets bonus ?

Typically No. Bonus is not shared with every customer or every policyholder. It is only paid to customers who have bought a Participating Insurance Policy such as  traditional insurance policies like the endowment policy, whole life insurance policy and money back plan. Each type of Traditional Policy has 2 versions, namely the Participating Insurance Policy and Non-participating Insurance Policy.

The key features of Participating policies are:

  • It will participate in the profits of the insurance company i.e It pays bonus to policy holders
  • The percentage of bonus that is paid to the policyholder is not fixed.
  • The premiums for participating policy are higher than the non-participating policy for a similar coverage and same customer criteria
What are the different types of bonuses given out ?

Most popular are the Reversionary bonuses. Features of these bonuses are :

  • They are declared as a percentage rate, which applies to the sum assured of the policy, in respect of the basic policy benefit.
  • Once declared, they form a part of the guaranteed benefits of the policy.
  • These are and paid at the end of maturity period only or on death, whichever is earlier.

Reversionary bonus are of following kinds:

  • Simple reversionary bonus
  • Compound reversionary bonus
  • Special reversionary bonus

Other kinds of bonus are :

Terminal bonus or Final additional bonus : Terminal bonus is paid at maturity or at the time of claim. After declaring reversionary bonuses if there are still residual profits available in the policy, they are declared as terminal bonus.

Loyalty addition (LA) :This is one time payment which will be given only after completion of certain period

Guaranteed Addition (GA)-In few plans bonus is guaranteed where life insurance company is obliged to pay fixed amount of bonus till the agreed period, called as Guaranteed Addition. Ex LIC’s Komal Jeevan and Jeevan Shree-1.

 What is Simple reversionary bonus ?

Simple reversionary bonus is a with profits life assurance bonus, normally declared annually, which is based on the profits of the life company’s investment and is payable at the maturity of the policy or prior death. Simple reversionary bonuses are declared as a percentage rate, calculated on the sum assured. For example if you hold a policy of Rs 10,00,000 Sum assured and the simple reversionary bonus for the year declared is Rs 60 per thousand sum assured, then your bonus amount is Rs 60 * 10,00,000/1,000 which is Rs 60,000 for this year, but you will only get it at maturity or on death.

What is Compound reversionary bonus? How is it different from simple reversionary bonus?

Compound reversionary bonuses also declared as a percentage rate like simple reversionary bonus but they are applied to sum assured and to the reversionary bonuses already attached to the policy. The difference is in the way the bonuses are accrued. For example a compound reversionary bonus of 4% for a sum assured of Rs 1 lakh cumulative accumulated bonus amount over a 15 year term will be

Year Sum Assured (SA) Cumulative SA incl. bonus accumulation Bonus amount (Rs) for the year Bonus amount forSimple Cummlative SA incl. bonusfor simple reversionary bonus
Year 1 100,000 1,00,000 4,000 4,000 100,000
Year 2 100,000 1,04,000 4,160 4,000 104,000
Year 3 100,000 1,08,160 4,326 4,000 108,000
Year 4 100,000 1,12,486 4,499 4,000 112,000
Year 5 100,000 1,16,986 4,679 4,000 116,000
Year 10 100,000 1,42,331 5,693 4,000 140,000
Year 15 100,000 1,73,168 6,927 4,000 160,000
What is Special reversionary bonus or One time bonus?

During the term of the policy, if there are some profits arising due to a one-off reason, and the same profits are not expected to repeat again, this profit is passed on to policyholders as a one-time bonus which is called as special reversionary bonus. This bonus is declared immediately but paid at the time of claim or maturity.

For example to coincide with its fiftieth anniversary, the insurance mammoth, Life Insurance Corporation of India (LIC) announced a special bonus for its policyholders on September 2005. Apart from the special bonus, the corporation announced a final additional bonus for its policyholders. Ref: Policyhaat

What is terminal bonus or Final addition bonus ?

The terminal bonus is given at the end of the life of traditional policies. Its value is not guaranteed  and it is different from the reversionary bonus, which is paid out annually by insurers. After declaring reversionary bonuses if there are still residual profits available in the policy, they are declared as terminal bonus.

What is Loyalty addition?

Loyalty addition is the incentives given by an insurer as an additional benefit to the insured for keeping the policy in full force throughout the term of the contract.Rates are determined by the insurer on the basis of its performance.

What is Guaranteed Addition?

Insurer is obliged to pay fixed amount of bonus till the agreed period, called as Guaranteed Addition. This assured bonus will be given to the policyholder whatever be the performance of the corporation for the period in questionat the end of the term of the policy or in case of the early death of the policyholder. Ex of sunch a plan are LIC’s Komal Jeevan and Jeevan Shree-1. For example in LIC Komal Jeevan

The policy provides for the Guaranteed Additions at the rate of Rs.75 per thousand Sum Assured for each completed year. The Guaranteed Additions are payable at the end of the term of the policy or earlier death of the Life Assured.

For example for a policy taken for child at Age at entry: 0 years, with Premium Paying Term: 18 Years ,Annual Premium: Rs. 7281, Policy Term: 26 Years,Sum Assured: Rs. 1,00,000  Guaranteed additions are shown below

Year Total premiums paid till end of year Benefit on Death during the year (Rs.)
Guaranteed Variable Total
Scenario 1 Scenario 2 Scenario 1 Scenario 2
1 7281 7281 0 0 7281 7281
2 14562 14562 0 0 14562 14562
3 21843 21843 0 0 21843 21843
4 29124 29124 0 0 29124 29124

 

 

 

 

 

 

How does a Life Insurance company have surplus?

A life insurance company can declare bonus only out of the surplus (similar to profit) determined at the end of each year. Life fund is a pool of money held by a Life Insurance Company into which all life assurance policy holders premiums are paid and all claims are made from. The life fund can only be invested in fixed return guarantee products like the bank fixed deposits, etc. where the money can be withdrawn irrespective of the market performance. A surplus can happen in the Life Fund under the following circumstances:

  1. Favourable Investment experience – If invests earn a higher rate of return than expected to the life insurance company
  2. Favourable Mortality experience – if less number of people die within a specific period than calculated by the life insurance company
  3. Ceding bonus – Bonus received by the life insurance company from the re-insurers

From the surplus liabilities of the life insurance company are deducted. The liability under a policy is defined as the discounted value, as on March 31, of contractual benefits + discretionary benefits + expected expenses in future minus future premium income. The sum assured and bonuses already declared are known as contractual benefits. All types of bonuses expected to be declared in future are known as discretionary benefits. The bonus for the current year has to be declared out of the surplus that emerges.

However, the entire surplus cannot be distributed as current year’s bonus. The company has to first pay tax on the surplus that emerges. From the balance surplus, it has to be pay to the shareholder (LIC pays 10% to the Government) as its share of the surplus. The surplus thus gets depleted before it can be distributed to the policyholders.

Minimum 90% of the profits earned by the life insurance company has to be distributed to the policy holders The insurance company can retain maximum 10% of the life fund’s surplus. The percentage of bonus that is paid to the policyholder depends upon the surplus of the life fund.

For example quoting from Press release in Economic Times LIC has paid Rs 1,137.99 cr to the Government of India as dividend for 2010-11.

LIC had declared a valuation surplus of Rs 22,752.71 crore for the financial year ending 2011. For the 2010-11, LIC had received a total premium income of Rs 2,03,358 crore as against Rs 1,85,986 crore in the previous showing a growth rate of 9.34 per cent. The total life fund of LIC stood at Rs 11,51,200.58 crore as against Rs 9,99,517.59 crore in the previous year. The total assets of the company rose to Rs 13,17,416 crore from Rs 11,52,057.21 crore in the previous year.During 2010-11, LIC settled more than 1.89 crore claims for an aggregate amount of over Rs 57,557 crore.  Life Insurance Corporation of India (LIC) has paid Rs 1,137.99 cr to the Government of India as dividend for 2010-11.

How is the bonus rate decided?

The amount of bonuses declared annually depends on the amount of surpluses in the Life Fund. This, in turn, depends on economic conditions and equity markets. If life insurance companies experiences good surpluses year on year, it could pay a high level of bonuses. If, however, economic conditions are poor and less surpluses are expected, Insurance companies could reduce the bonus rate to reflect the actual investment returns in the Life Fund. The bonus rate is decided after considering a variety of factors such as the return on the underlying assets, the level of bonuses declared in previous years and other actuarial assumptions (especially future liabilities and anticipated investment returns), as well as marketing considerations. Bonus rates of LIC for some of the policies for different years are shown below , for most of policies it is constant but for some like Jeevan Pramuk bonus rates has increased and for Jeevan Bharti bonus rates decreased and then increased.

Example of Bonus rates of LIC

Example of Bonus rates of LIC

Are bonuses guaranteed?

Once bonuses are declared, they are guaranteed. However, the bonus rates of all life insurers are not guaranteed.

 Do bonuses affect the benefits in my policy?

Yes. Bonuses, once declared, will increase the value of your policy. Sometimes this may become more than the maturity sum assured. For example a person has taken a

  • policy having maturity amount of rupees 5,00,000 for a term of 20 years.
  •  if the bonus is calculated at an average of rupees 42 per thousand sum assured
  • Then the total bonus amount accrued for him at the end of 20 years would be 20 x 500 x 42 = 420000 which is just 80,000 short from the maturity amount. So the total amount received by the policy holder will be 5,00,000 + 4,20,000 = 9,20,000.
When do I get the bonus?

Suppose Mr.Sharma take insurance policy at the age of 30 yrs. Term of the Plan is 25 yrs and Sum Assured opted is Rs 10,00,000. So from start to maturity period he is entitled for the bonus which insurance company declares. It will get paid on maturity. If something happens to him during the period of policy term then his nominee will receive Sum Assured+Accumulated bonus till that period.

Will I get bonus if I surrender?

As bonuses are paid at the end of the policy, if you surrender your policy then you will not get the actual accrued bonus. Calculation of bonus amount is based on future value as it is supposed to paid in future.  For example

Let’s say Mr Ram had bought a policy with sum assured of Rs. 5 Lakhs. It had a tenure of 10 years, and he paid premiums for 5 years. The accrued bonus is Rs. 1,00,000.And surrender value factor is 0.3. In this case, if he surrenders the policy he would get:

=Original sum assured * (Number of premiums paid / Total number of premiums that were required to be paid) + Accrued bonuses * Surrender value factor

= Rs. 5,00,000 * (5 / 10) + (Rs. 1,00,000 * 0.3)

= Rs. 2,50,000 + Rs. 30,000 = Rs. 2,80,000

Will I get bonus if I make my policy paid-up?

When you make a policy paid up, you don’t have to pay any more premiums. However, your insurance cover reduces and for the  reduced amount continues till the maturity of the policy. Reduced cover is called the paid up value, and is in proportion to the number of premiums paid.

Paid up value = Original sum assured * (Number of premiums paid / Total number of premiums that were required to be paid)

Although the insurance cover continues, you would not be eligible for any future bonuses declared by the insurance company. However, you would retain any bonuses paid out before you made the policy “paid-up”. You do not get any amount when you convert a policy to “paid up”. Instead, you get an amount equal to the paid up value plus any bonuses accrued before you made the policy “paid-up” at the time of maturity, or in case of early demise.

For example Mr Sharma has a policy with Sum assured of Rs. 5 Lakhs, tenure of 10 years, and premiums paid for 4 years. The accrued bonus is Rs. 1,00,000. If he makes the policy paid up, the new sum assured would be:

Rs. 5,00,000 * (4 / 10)= Rs. 2,00,000

Thus, a cover of Rs. 2,00,000 would be available to him till the policy matures  for another 6 years or till his death. On maturity at the end of 6 years or in case of untimely death, proceeds from insurance policy would be Rs. 2,00,000 + Rs. 1,00,000 = Rs. 3,00,000.

Does my insurance policy qualify for bonus payouts?

To find out if your insurance policy is a ‘with-profits’ policy, you can check your policy document or contact your insurance adviser.

 How do I find out the bonus rates for my policy?

Insurance companies declare bonus rates and information is available on their websites , for example  bonus rates of LIC, bonus rates of ICICIPruLife. To find how much bonus your policy has collected you can register your policy online and check details or contact the insurance adviser or insurance company with your policy details. Sometime back LIC  provided facility to get details through SMS, asklic <PolicyNumber> <premium/loan/bonus/revival/nom> and sms to 56677  ex: asklic <PolicyNumber> <loan>, but it’s not working now.

Related Articles:

In this article we have explained about bonus of life insurance policies? Have you take a life insurance policy with bonus? Is it from LIC or private insurance companies? What made you choose the policy?

 

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