It was the first time I was applying for an insurance policy and being a novice I barely knew what to do. All I knew was that I wanted maximum returns out of the money I was investing. It was then that my friend advised me to go for a ‘with-profit' or a "participating" policy.
Unaware of the terms, I did a little research and came up with some very interesting results. I was quite happy to know that there are some Endowment Policies where the insurers offer Bonus. Thus, apart from maturity and death benefits, they shared a part of their profits with the policy holders, i.e. the policyholders are allowed to "participate" in the bonus that is declared. Quite lured by the prospect of the bonus, I went for a ‘with-profit' policy at once. But I still was confused as to what the bonus exactly was and how and when it was calculated. I did a lot of further research, spoke to many people and finally understood the concept. Here, I share my findings with you.
What is bonus?
Bonus is an amount paid to the policyholder in addition to the benefits received at maturity or in the event of death. Every policyholder however isn't entitled to bonuses. If you want to avail of the bonus, you have to opt for a ‘with-profit' policy. The premium you pay is different (usually higher) than a regular policy.
Types of bonuses
Bonuses are mainly of two kinds - Interim Bonus and Terminal Bonus. The Interim Bonus is paid when there is a suspension of the policy in the midst of a financial year, either due to the maturity of the policy or due to the death of the policyholder.
The Terminal Bonus is paid at policy maturity or surrender. This is usually a percentage of the profits made by the insurance company. There are bonuses like Annual Bonus, Loyalty Bonus, etc. that sometimes are paid over and above the ones mentioned.
How is the bonus calculated?
The insurance company amasses the premiums of all the policyholders and invests the money in bonds and equities to earn higher profits. This profit, in addition to lower-than-expected claim settlements and other monetary gains, is distributed among the ‘with-profit' policyholders in the form of bonuses. The bonus rate is calculated after careful financial analysis, taking into consideration the following factors:
1. Return on primary benefits
2. An average of previous bonus rates
3. Expected market returns
4. General condition of the financial markets
When is the bonus received?
The insurance companies usually credit the bonus amounts to the accounts of the policyholders at the end of the policy, or in the event of death. The entire amount is received together and the policyholder cannot claim the bonus before the maturation of the policy.
Written By: Deepak Yohannan
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal
For more articles by Deepak Yohannan, please visit MyInsuranceClub.com
You may write to the author at Deepak@myinsuranceclub.com