Bonus, in Reference of Life Insurance:
Bonus is the lump-sum money added to your remuneration for the great performance of your work, for the defined period. Some time in festive sessions, we get the bonuses. This type of bonus is well known to us, as we get it in our salary.
But, the Bonus in reference to Life Insurance has some different definition. Like there is interest in Banking Industry, we have Bonuses in Life Insurance Industry.
In Life Insurance Industry, Bonuses declared at the end of each Financial Year on the basis of the Profit of the Life Insurance Company for the particular product. In regular parlance, Bonus is an additional money allocated to the policyholders, as percentage of profit earned by the Life Insurance Companies for the particular product, and paid to insured person at the time of claim/maturity or sometimes on the request of insured person.
Normally, bonuses added to policy after first three years from the date of policy initiation.
Bonuses are of below type:-
- Yearly Bonus – Declared at the end of each financial year on the basis of the profit and it can’t be removed by the Life Insurance Company after declaration of the bonus, and paid at the time of claim, maturity or request by insured person.
- Terminal or Persistency Bonus – Terminal or Persistency bonus added to the policy the the end of term on the basis of overall performance of the policy, and paid to insured person at the time of claim or maturity.
Types of Yearly Bonuses:-
- Simple Reversionary Bonus (SRB) – This type of bonus calculated on Sum-Assured only, each year and declared each year, but added to the policy at the end of Policy Term. It is similar to the simple interest of Banking Sector. Presently mostly all companies including LIC, pays Simple Reversionary Bonus. There is monetary loss to the insured person in terms of Maturity and Sum-Assured, in Simple Reversionary Bonus.
- Compound Reversionary Bonus (CRB) – This type of bonus calculated on Sum-Assured plus the previously accrued bonuses, each year and declared each year, and added to the policy at the end of each financial year. It is similar to the compound interest of Banking Sector. Presently only one or two companies including MaxLife, pays Compound Reversionary Bonus. There is monetary profit to the insured person in terms of Maturity and Sum-Assured.
You can see the major difference of SRB and CRB in illustration of Whole Life policies like Jeevan Anand and Max Anand of the LIC and MaxLife respectively, in SRB your maturity will not be too good and Sum-Assured will be same for entire Life, while in CRB you will receive handsome maturity plus Increasing Sum-Assured as your age increase. In CRB insured person get double benefit of bonus, Life cover will increase per year on add-up of bonus to the policy and handsome Maturity/Claim.
This difference of sum-assured and Maturity you can see in all type of Participating Policies like Endowment Plan, MoneyBack Plan, Child Education Plan and etc.
Note:- Bonus is not pre-declared percentage like the Bank Interest. In illustrations, insurance companies shows two tables at 4% and at 8% as per IRDA rules & regulation, it’s just a forecasted value. Actual amount may be higher or lower per the bonuses declared by Life Insurance Companies each year. Bonuses are Non-Guaranteed part of Life Insurance Policy.