The different types of insurance bonuses
Insurance bonus is broadly categorized in three brackets. They are:
1. Reversionary bonus
This is a kind of fixed bonus. It is declared at the beginning of the policy and added to the sum assured from time to time. This bonus is available in with-profit traditional insurance-cum-investment policies. Such policies get a share of the profits of the investment fund. The premium paid by all the policyholders is put in a common fund and if and when there is a surplus, the bonuses are paid out. The reversionary bonus is usually fixed as a percentage of the sum assured and is paid at the time of the policy maturing or while paying out the death benefit.
Reversionary bonus can further be divided into two groups - the simple reversionary bonus and the compound reversionary bonus. A simple bonus is nothing but a fixed percentage of the sum assured whereas the compound bonus is a percentage of the compound sum assured. If the sum assured is Rs.100 and the simple reversionary bonus is fixed at 6%, then at the end of the first year the policy holder will get Rs.106 and after 2 years he will get Rs.112. However, in the case of a compound bonus, the amount would be Rs.106 for 1 year and Rs. 112.36 for 2 years.
2. Loyalty bonus
Loyalty bonus, as the name suggests, is a prize given to you for sticking to a policy for a long period of time, commonly 10 or more years. Both ULIPs and traditional insurance policies offer this kind of bonus. In the traditional policies, the loyalty bonus is a fixed percentage of the sum assured while in a ULIP it is a percentage of the fund value. It is important to note here that the loyalty bonus is never a huge chunk of money and doesn't really make a significant difference in the returns.
3. Terminal bonus
The terminal bonus is paid when the policy terminates. It is paid as a reward to the policyholder for maintaining the policy well till the very ending.
The insurance bonuses are always useful and add move value to your investment. It must however be noted that bonuses are not paid out if the policy is surrendered. Many insurance companies also do not pay bonuses when paying out a death benefit. Only the reversionary bonus is always paid along with the death benefit.
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal.