Six smart things to know about bonus in insurance plans

1. When a life insurance company makes a profit, it is supposed to distribute a part of that profit to its policyholders, in the form of bonus payments.

2. Not all life plans are eligible for bonus. Plans can either be participatory, thereby qualifying for bonus, or non-participatory, that do not qualify for bonus.

3. Bonus is different from guaranteed addition (GA). Bonus depends on the insurer’s profit while GA is an assured addition to the policy and is disclosed upfront.

4.Bonus depends on quantum of investment gains of the ‘with profit’ fund either as a certain amount per `1,000 sum assured or as a percentage of the sum assured.

5. In most traditional life policies, bonus amount keeps getting added to the policy and keeps accumulating till the policy’s maturity. This is ‘reversionary’ bonus.

6. Terminal bonus is added on maturity of policy or on death. It is a onetime bonus that the insurer declares for policyholders who keep policy till maturity.

(Content is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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