Outlook Money
Certain life insurance policies allocate a share of their profits as a bonus. This is an extra payment one receives in addition to the entitled basic sum assured.
Bonus in life insurance is only offered in traditional life insurance policies. These include participating and Unit Linked Insurance Plans.
Once an individual buys a traditional life policy, a part of their annual premium is invested in various funds such as government debts. Based on the returns of these investments, the insurer declares the bonus the policy has earned at the end of the financial year.
The bonus starts building up from the first year and is credited to the accounts of the policyholder at the end of the maturity period. If the policyholder passes away, the insurance company will give the accumulated bonus collected to the nominee.
If the policy is surrendered before maturity, there is no bonus.
Insurance company gathers premiums from all policyholders to build a corpus for the beneficiaries. Most of this fund is invested in bonds or debt instruments. They evaluate investment returns and insurance obligations at the end of every financial year.
Compiled by Syed Muskan