What is the concept of bonus in insurance? As an NRI, how can you earn added value from your USD policies? These are some of the questions we seek to answer in this article.
What Is Bonus in Insurance and Why Does It Matter for NRIs?
What is the bonus meaning in insurance, particularly when you’re investing in insurance plans? They are basically a share of the profits that a company earns, thereby scaling up your policy value over time. You can consider them an extra benefit beyond the basic sum assured amount, and they are paid out either when a claim is made or at the time of maturity. It matters for NRIs, since you can use these amounts to get added value from USD-denominated overseas insurance.
Types of Bonus in Insurance Policies
There are several types of bonus in insurance policies that you should know more about.
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Reversionary Bonus- What is reversionary bonus? Profits allocated for every participating policy are paid out in the form of this bonus. This adds value to the overall amount that is payable to the policyholder or the nominee. This is mostly declared at the conclusion of each financial year, payable at the time of the claim. It is usually of two types:
a. Simple reversionary bonus in insurance: This is a percentage of the sum assured and declared as per thousand of the sum assured each year. So, in this case, the bonus rates in life insurance are important. Suppose it is INR 50 for every thousand of the sum assured and in case the latter is INR 5 lakh. Then the bonus amount will be INR 50 x (5,00,000/1000) = INR 25,000.
b. Compound reversionary bonus- It is also a percentage rate, while applying to not just the sum assured, but also the bonuses accrued (previously available) in the policy. The bonus for each year will be added to the sum assured amount and the next year’s bonus will be worked out on the overall amount. The bonus goes up with time owing to the effect of compounding.
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Interim Bonus- These bonuses are not formally declared at the close of each financial year. However, it is payable in case the policy matures or there is a death of the policyholder between two successive dates of formal bonus declaration. This is calculated for the days remaining from the last date of the declared bonus.
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Terminal Bonus- Wondering how terminal bonus works in insurance? It is declared and added solely for policies that attain maturity or result in a death claim after a specified period. This is offered for keeping the policy until the date of maturity or death claim. It does not usually apply to policies which one surrenders or those that have acquired paid-up value before the minimum specified period.
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Cash bonus in insurance- It is paid in the form of cash based on the accrued surplus of a year. This bonus is paid on a yearly basis to the policyholder instead of accumulating within the policy or being paid at the time of maturity.
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Loyalty bonus in insurance policies- This is a bonus paid by the insurance company for remaining committed to the policy for the long term. These additions usually happen after a specific number of years and are paid at maturity or upon the demise of the policyholder.
Understanding Terminal Bonuses and How They Work
Understanding the terminal bonus vs. reversionary bonus aspects is crucial in this regard. Terminal bonuses are also called persistency bonuses. They are payable when the policy matures or to the nominee in case of the unfortunate demise of the policyholder within the policy period, provided minimum policy years are completed. This is given to appreciate timely payments of premium amounts, while being subject to the insurer’s decision to pay it or not. There is no guarantee/assurance of the same.
Bonus vs Dividends in Insurance: What Sets Them Apart?
Here is a guide to understanding the difference between bonus and dividends in insurance. Bonuses are additions to the sum assured of participating policies while dividends are payments in cash that may be used for lowering the future premiums. They are received annually as immediate financial benefits, in case they are declared, while bonuses are received only in case of the policyholder’s demise or at the time of maturity.
Bonuses can compound over time and scale up the final payout upon reinvestment, while dividends do not compound and offer instant liquidity. Neither is guaranteed and depends on the financial performance of the insurers and decisions made annually by the company’s board of directors, looking at the profits in question. Participating endowment and whole life insurance plans are readily available, where the insurer may offer bonuses to earn extra value. So, if you choose international life insurance plans with USD denominations from HDFC Life International, then it may help you meet your future goals, get cross-border protection for your family members, and grow your wealth with profit sharing or bonus potential to grow your wealth. You can check out participating life insurance policies to get extra benefits in this regard.
