When a life insurance company makes profit (surplus), it is supposed to distribute a part of that profit to its policyholders, in the form of bonus payments. Equate this with companies declaring dividends on making profits in case of equity shares. The surplus in a life insurance company may arise after valuation of the insurer's assets and liabilities and so, any excess of assets over liabilities is the surplus amount. This surplus gets distributed among the policyholders at the end of each financial year in the form of bonus.
Which policies qualify for bonus?
Bonus is not payable to every policyholder but depends on the kind of policy one holds.
Traditional insurance plans, such as endowment or money-back plans, can either be 'participatory' (or 'with-profit') plans, thereby qualifying for bonus, or 'non-participatory' (or 'without-profit') plans that do not qualify for bonus. Understandably, 'non-participatory' policies come at a lower premium compared to 'participatory' ones.
The returns in some 'with-profit' policies may not depend on bonuses. Instead, in such policies, there is a 'guaranteed addition' (GA) to the policy. Bonus is unknown and depends on the insurer's profit while GA is an assured addition to the policy. It is disclosed to the policyholder upfront while buying the policy.
Bonus declaration
Based on the actual experience of the 'with-profit' fund, the insurer declares the rates of bonus for the previous financial year, i.e. in arrears. The quantum of surplus and bonus mainly depend on the amount of investment income earned while other factors such as mortality, expenses also play a part. Expectation of interest rates in the future also plays an important role while declaring the bonus amount.
How is bonus calculated
Bonus is declared either as a certain amount per RM1,000 sum assured or as a percentage of the sum assured. For example, bonus may be RM40 for every RM1,000 of the sum assured. So, for a policy with the sum assured of RM1 million, the bonus amount will be RM 4,000. In the above example, if the term of the policy is ten years, the total bonus accumulated on maturity will be RM 40,000. Some insurers also allow policyholders to encash them during the term of the policy. If the policyholder dies during the policy term, the nominee gets the sum assured and the bonuses accumulated till the year of death.
Types of bonuses
Simple Reversionary Bonus: In most traditional life insurance policies, the bonus amount keeps getting added (accrued) to the policy and keeps accumulating till the policy's maturity. This is the case of a simple reversionary bonus. In the above example, Rs 40,000 is a simple reversionary bonus.
Compound Reversionary Bonus:
From the second year onwards, if the bonus is declared on the sum assured plus the previous year's attached bonus, it is a case of compound reversionary bonus. In both the cases, one can get the total bonus only on the maturity of the plan or death as that is 'reversionary' in nature.
Interim Bonus: Bonuses are declared at the end of the financial year. But, what if a policy matures or death occurs before the end of that period? Insurers declare interim bonus to take care of such situations and to avoid putting such policyholders at a disadvantage. The amount of bonus, however, is added to the policy on pro-rata basis for that specific year.
Terminal Bonus: As the name suggests, terminal bonus is added only on the maturity of the policy or on death. It is a one-time bonus that the insurer may declare for policyholders who have run the policy till its original term. This bonus will therefore not be payable on policies which have acquired paid-up value or have been surrendered.
Unique features of bonuses
>>In a 'with-profit' policy, bonus may or may not be declared by the insurer as it is dependent on the company's (or fund's) profitability.
>>The quantum of bonus may therefore differ in each year depending on how much profit is generated by the insurer.
>>The bonuses are declared on annual basis for each policy year during the term of the policy, provided the policy is in force as on the date of bonus declaration (i.e. all due premiums have been paid).
>>Once declared and allocated by the insurer, a bonus becomes a part of the policy and is guaranteed to be paid by the insurer on maturity or at the specific time as per the policy schedule.
>>The amount of bonus to be added to a policy will depend on the term of the policy. Typically, whole life insurance plans are entitled to a higher bonus amount.
>>If a policy acquires paid-up value, then the annual bonus added to date remains credited to that policy, but the policy will receive no further bonus additions.
>>The bonuses attached to the policy benefits cannot be encashed without terminating your policy.
>>Bonuses are payable only at the time of death claim, maturity claim or on surrender of the policy.
How bonus fits in your plan
Get a fix on the term of the policy. For example, you want to save for 15 or 20 years. Ask the agent to show the bonus rate declared by the insurer in the previous year for the same duration. In the present day interest rate scenario, the total amount of bonuses over 20 years will just be equal to the sum assured. This should give some idea to the policyholder about the maturity value (sum assured plus bonus) of a policy to be able to meet his/her long-term goals.
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