What are various bonuses in life insurance plans?
You might observe that LIC and other insurance companies indicate that they pay a bonus for the life insurance plans they issue. However, many of us would get confused about various bonuses offered by insurance companies. Insurance companies offer bonuses in life insurance plans to attract policy holders. What are various bonuses in life insurance plans? Does every policy holder to get a bonus from the insurance plan they subscribe? How smart you should be in select insurance plan which offers bonus?
What is life insurance plan?
Life insurance is a contract between an insurance company and the insurer where the former promises to pay a designated sum of money (sum assured) upon the death of an insured person. Basically, life insurance is a protection against the financial loss that may occur due to death of a person.
There are basically two types of insurance plans- term insurance and whole life insurance. The rest is the variable extracted from these basic two.
Also Read: 10 Best Term Insurance Policies in India
What are the various types of life insurance plans?
Now let me discuss about these life insurance plans in detail.
Term plan policy
This is the most basic form of insurance plan under the insurer agrees to cover the individual for a certain period. The insured pays the decided premium for that certain period and if he dies during that period, the compensation is paid to the family. In case he survives during that period, nothing is returned to the insured. In summary, this is plain, simple plan, something happens to policy holders, his/her nominee would get sum assured, otherwise, nothing is paid.
Whole life policy
A whole life policy covers the policyholder over the entire life. The tenure of the policy is not defined and the policyholder pays regular premiums until his death, upon which the corpus is paid to the family. Means, under this plan, policy holder would not enjoy the benefits of this plan.
Endowment Insurance plan
This is a term plan with an additional feature of maturity benefit. Endowment plan pays the assured sum in both the cases-death or maturity.
Unit Linked Insurance Plan (ULIP)
It is a variant of endowment plan in which the investment is linked to markets. The individual can choose the allocation of funds for investment in stock or debt markets. The value of the investment portfolio is captured by the NAV. Basically, it is a combination of insurance and investment.
Money back policy
It is another variant of endowment plan. It gives periodic payments over the policy term. During the tenure of the policy, a portion of the sum assured is paid out at regular intervals. If the insured survives till the end, he gets the balance sum assured and in case of death, the beneficiary gets the whole sum assured.
What is bonus offered on life insurance policies?
Now, let us come to the main topic of this article.
The life insurance companies have attached the feature of bonus to catch the attention of the individuals. The bonus is one term that attracts one and all. In common parlance, bonus means the payment received over and above the Sum Assured. The bonus is received even in insurance policies.
The bonus is not payable on all the policies, but depends upon the policy one has taken. Few policies are participatory while others are non-participatory plans. Participatory policies are those that come with a feature of qualification of bonus and obviously they have a higher premium as compared to the non participatory bonus that does not qualify for any bonus.
However, in some policies, the return is not directly linked with the profit of the company. There is certain percentage, fixed over and above the assured sum, i.e. guaranteed audition (GA). The bonus is not certain and depends upon the profit of the insurer company while GA is an assured amount to be given to the policyholder.
What are various bonuses in life insurance plans?
In this section, I would cover various bonuses payable by the insurance company and its features.
Simple reversionary bonus
The simple reversionary bonus is where it gets accumulated and keeps on adding in the policy amount. At the end of the term of the policy, the insurer receives the amount along with the sum insured.
Compound reversionary bonus
In this category, the bonus gets accumulated in the policy account, but from second year onwards, the bonus is calculated on the sum assured plus the last year’s bonus i.e. compounded. This way, the amount of bonus increases every year. But, it is paid at the end of the policy only.
Generally, bonuses are declared at the end of the year, but if the policy matures or death occurs before the year end, insurers declare interim bonus to avoid the disadvantage to the policy holder. The amount of bonus is added to the policy on the basis of pro-rate for that specific year.
As the name says, terminal bonus is added to the policy only on the maturity or on death. It is a one time bonus that the insurer declares for the policyholders who have carried their policy till the end of the term.
When you buy a life insurance plan, there are many features and conditions attached to the life insurance policies. The companies even attach the additional feature of bonus to catch the attention of individuals and make it more attractive. One should understand what bonuses are paid and how much extra premiums they are paying. Understanding these concepts would help to buy a right insurance plan.
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What are various bonuses in life insurance plans
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