Did you know that life insurance plans can also include a bonus? 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. The idea behind bonuses is straightforward: the extra sum that accumulates under the plan every year is paid to the policyholder at death or upon maturity.
“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,” Naval Goel, founder and CEO, PolicyX.com, an insurance web aggregator said.
Now, the policyholder has a choice to either withdraw this bonus yearly, at the time of maturity along with the maturity benefit or leave it for the nominee along with the death benefit after their demise. The bonus earned by a life insurance policy depends on the age of the policyholder, the policy term, and the premium amount. This means that the higher the premium paid, the more funds are invested by the policy and thus higher returns.
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 till that unfortunate day to the nominee. However, if the policy is surrendered before maturity, there is no bonus.
The insurance company gathers premiums from all policyholders to build a corpus for settling the claims of the beneficiaries. Most of this fund is invested in bonds or debt instruments, and a small slice in equities to generate profits. They evaluate investment returns and insurance obligations at the end of every financial year.
Afterwards, the profits are shared as annual bonuses among policyholders. 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.
Keep In Mind: The bonus declarations made by the insurer at the end of each financial year play an important part when it comes to screening how fruitful the returns are. Based on these declarations, the policyholder can estimate how much bonus the policy has accumulated, and whether it is performing well. This leads to the deciding factor of whether to surrender the policy or continue with it.
Aditya Mall, appointed actuary, Future Generali India Life Insurance Company said, “Life insurance bonuses provide policyholders with a glimpse of the insurer's financial and underwriting performance. However, it's important to understand that these bonuses aren't guaranteed and can vary based on factors like investment returns and the insurer's stability and its operational efficiencies.”
“To navigate this, policyholders must carefully review their policy details and seek advice from financial experts to ensure that the product category is an appropriate fit for the need. Understanding these nuances is essential for making informed decisions and aligning insurance benefits with long-term financial goals. Ultimately, life insurance bonuses represent a partnership between policyholders and insurers, where both parties benefit from shared success. Therefore, grasping the mechanics of these bonuses is crucial for the policyholders in securing financial stability,” Mall added.
