A bonus is usually defined as an extra benefit that is given over and above what’s expected. Investment-cum-insurance policies, too, offer you a bonus. This bonus broadly comes in three forms.
Once declared, this bonus becomes guaranteed and gets added to the sum assured. Reversionary bonus is given in participating traditional insurance-cum-investment plans. A participating traditional plan is one that gets a share in the profits of the investment fund. The policyholder’s money goes into a life fund and depending upon the surpluses of the fund, the company declares a bonus from time to time. This bonus is typically a percentage of your sum assured and is paid along with the sum assured either on death or on maturity.
You must be careful with reversionary bonus as it can significantly affect your returns. There are two kinds: simple reversionary bonus and compound reversionary bonus. A simple reversionary bonus is a percentage of the basic sum assured, whereas a compound reversionary bonus is a percentage of the compounded sum assured. For example, a 6% simple reversionary bonus on a sum assured of Rs 100 will bump up the sum assured to Rs 106 in year one and Rs 112 in year two, but a compound reversionary bonus will bump up the sum assured to Rs 106 in year one and Rs 112.36 in year two and so on. Usually, the rate at which simple reversionary bonus is paid is more, but in the long term, a compound reversionary bonus tends to give more.
This is usually given after you have stayed in the policy for a certain period of time, usually 10 years or more. Traditional plans as well as unit-linked insurance plans (Ulips) offer it. In traditional plans, loyalty additions are usually a percentage of the sum assured, which gets added to your overall benefits. In Ulips, these are usually a percentage of the fund value. Loyalty bonus is usually a small amount that does not significantly improve your returns.
This is a one-time payment that the insurance company gives you on maturity. This bonus is a reward for staying in the policy until maturity and is offered by both Ulips and traditional plans.
Word of caution
You are not entitled to these benefits if you surrender the policy. Some policies don’t offer these bonuses even on death of the policyholder. Reversionary bonus, however, is usually payable on death as well.