Explore the types & benefit of bonus in life insurance

In addition to monetary protection for your family against the risk of one’s unfortunate demise, Life Insurance Policies provide financial benefits in many instances. The bonus, for instance, adds value to the policy over time in the case of some types of policies. These bonuses are available in Participating Life Insurance Policies and are paid either periodically or at the end of the policy term. Such bonuses add value to the coverage, and their dual benefit is both protection and savings. The types and benefits of bonuses in Life Insurance are explored further in this blog to help you know how such benefits can be beneficial in maximizing the value of a policy.

What is a Bonus in Life Insurance?

A bonus in Life Insurance is an extra sum of money paid by the insurance company to the policyholders as a kind of incentive for opting for a participating policy. The bonus adds value to the policy.

These bonuses are added to the policy at regular intervals or upon maturity and or paid as a cash bonus. The amount of the bonus may depend on the performance of the insurance company, its investment returns, and even the terms of the policy. With this knowledge of types of Life Insurance bonuses, the policyholder may select options that fit with one’s financial goals and get maximum insurance benefits.

Types of Bonuses in Life Insurance

Let's now discuss some of the bonus types in life insurance and the impact that each has on the policy's value.

1. Reversionary Bonus

The insurance company declares an annual value addition that is a reversionary bonus to the policy. Once added to the policy, the bonus becomes part of the guaranteed benefit payable at maturity or upon the unfortunate demise of the insured. Hence, the reversionary bonus increases with time and further increases the value of the policy. In return, it gives policyholders predictable and steady growth in the benefits.

2. Terminal Bonus

A terminal bonus is a bonus paid once to the policyholder at the end of the policy term, either on maturity or the unfortunate demise of the insured. This bonus is paid as a prize to policyholders who remain invested in the policy until the end of the term. Since terminal bonuses are only paid at maturity or death, they give an extra incentive to policyholders to keep their coverage until the end.

For example, at a maturity of 20 years, the terminal bonus may be earned along with the sum assured and the accumulated reversionary bonus in addition to adding to the total payout of the policy.

3. Cash Bonus

A cash bonus is the type wherein the insurance company gives an annual payout to the policyholder directly. A cash bonus differs from the reversionary bonus since it is not added to the sum assured, but rather provides a flexible payout to the policyholders as they can use the amount for any financial need that arises. This is a type of bonus, that is beneficial to those who want periodical cash returns instead of having the benefits accumulated.

Cash bonus, the bonus is allowed to be reinvested or to be liquidated for immediate needs without having a direct effect on the policy core benefits.

4. Interim Bonus

Interim bonus or partial bonus is paid when the policyholder decides to surrender their policy before the insurance company declares the next reversionary bonus. The interim bonus provides compensation for the periods the policyholder has stayed invested in the policy. This way, no matter how quickly the policyholder decides to exit the policy, they stand to get some of the bonus amounts even if they don’t stay the entire course of the proposed policy term.

For example, if a policyholder surrenders his or her policy after nine months, the insurer may pay an interim bonus based on the proportionate time the policyholder has kept the policy active and in-force which will protect the policy's accrued value.

Benefits of Bonuses in Life Insurance

Bonuses translate into several advantages that enhance the overall value of a life insurance policy. Here are some key benefits:

1. Enhanced Policy Value

Bonuses will include reversionary as well as terminal bonuses in the sum assured of policy. The bonuses will hence be accumulated year by year raising the value of the policy, and thus enhancing the financial security of the policyholder. The final payout in such instances is higher than the original value because the bonus accumulates at periodic intervals during the entire policy term.

For instance, a policy where the bonuses are compounded annually over many years may yield more than the assured amount to a large sum of money to the policyholder's beneficiaries.

2. Financial Security

The addition of bonuses to a policy's value enhances long-term financial security. These bonuses, through the building of wealth over time, contribute to a more significant Life Insurance payout, which can provide comprehensive financial support for dependents. This ensures that policyholders can build wealth while securing their family's future needs.

3. Flexible Payout Options

Life insurance bonuses come with flexible pay-out options. This means that policyholders can draw out from the policy value in various ways. In the case of cash bonuses, it means annual payout, that is, liquidity and being able to meet financial obligations as they arise. Reversionary and terminal bonuses are reinvested into the policy value. Thus, at any time, the policyholder can exercise the freedom to receive a payout through a method of his preference that meets his financial objective.

4. Incentive for Long-term Investment

With these bonuses, individuals have a financial reason to keep the policy active over the intended policy term. In policies that are periodically renewed and there is no break in the policy term, the bonus accrued enhances the maturity value. A bonus policy ensures long-term commitment both for the policyholder and the insurance company. 

Who Should Consider Bonus-Eligible Life Insurance Policies?

Bonus-eligible Life Insurance Policies, or participating policies, are ideal for those who want to combine insurance coverage with wealth accumulation. Here are some scenarios in which one may want to opt for a policy with bonuses:

• Long-Term Investors: One who has long-term financial goals such as retirement or children's education can reap the rewards of the value of bonuses accumulated over time.
• Predictable Returns: The policyholders who are interested in low-risk investment and predictable returns would like to have these policies with the guaranteed reversionary bonus.
• Flexible Payout: If you require cash flow without compromising the coverage, then a cash bonus option can provide returns periodically.

Consider exploring the various plans provided by Shriram Life Insurance. These plans are carefully created to match the varying needs of policyholders. 

How to Choose the Right Life Insurance Policy with Bonuses

As such, the selection process of life insurance policy with bonus, needs to be made in consideration of the following points:

• Bonus Type Awareness: Once you’re aware of the various types of bonuses available, you can make a well-informed decision on the plan that best suits your goal.
• Insurer Bonus Track Record: An insurer with an existing record of declaring normal bonuses as this indicates that bonus payments have a stable low volatility pattern, although past performance must not be taken as a guarantee of future returns or performance. 
• Terms and Conditions: It is important to understand the various terms and conditions associated with bonus eligibility, accruals, and payouts before making a choice on which Life Insurance Plan to purchase.

Conclusion

Bonuses in a Life Insurance Policy add more financial value by rewarding the policyholder for loyalty and long-term commitment. Bonuses, particularly in participating life insurance policies, are essential in maximizing the value of the policy, ensuring financial security, and providing flexible payout options. If you want to ensure future needs or accumulate wealth over time, selecting a bonus-eligible policy would be a good decision.

Explore the benefits of a saving plan, protection plan, and investment plan to secure your financial future with bonus-eligible life insurance policies, ensuring long-term security and wealth accumulation.