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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.
Insurance company gathers premiums from all policyholders to build a corpus for settling the claims of beneficiaries. Most of this fund is invested in bonds, and a small slice to generate profits. Investment returns and insurance obligations are calculated at the end of every financial year.
The bonus rate is determined by considering factors like return on underlying assets, past bonus rates, filed claims, financial market conditions, and other relevant factors.
The bonus declarations made by the insurer plays an important part when it comes to screening how fruitful the returns are. Based on these declarations, policyholders can estimate how much bonus the policy has accumulated. This leads to the deciding factor of whether to surrender the policy or continue with it.
Compiled by Syed Muskan