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Photo: iStock
Photo: iStock

How loyalty additions work in a unit-linked insurance plan

Different insurers use different terms to describe loyalty additions. ut they all do the same thing: add a little extra sum to your investment corpus

In order to get your attention and to retain it, insurance companies offer loyalty additions. As the name suggests, loyalty addition is the extra amount you get if you stay the course with the policy. Loyalty additions are popular in unit-linked insurance plans (Ulips). Here’s how they work.

Different insurers use different terms to describe loyalty additions, such as additional allocation, extra allocation and premium booster. But they all do the same thing: add a little extra sum to your investment corpus.

Since the idea of this benefit is to make sure you don’t surrender the policy midway, loyalty additions typically kick in during the latter half of the policy term. Some policies offer these benefits right from the beginning, while some introduce loyalty additions after the lock-in period of five years. In some cases, the loyalty addition is paid only on maturity.

In Ulips, there are primarily two ways in which loyalty additions apply: as a percentage of the premium, or as a percentage of the fund value. In the case of traditional plans, loyalty additions could also be described as the percentage of the sum assured.

Loyalty additions usually don’t accrue every year and have little to do with the performance of the underlying portfolio. This is more an extra allocation by the insurer to your investment as a reward for staying invested.

Loyalty additions are guaranteed once they accrue and are payable on death, maturity and even on surrender in the case of Ulips. How much the insurer chooses to offer depends on various factors such as the premium amount, policy term, premium payment term and the periodicity of the guaranteed additions. Typically, loyalty additions that get triggered later in the policy tend to be higher. For instance, we looked at a Ulip that gives loyalty additions from the very first year. In the first five years, the loyalty addition is 1% of the premium amount. So if you pay a premium of Rs100, then over and above this money that gets invested net of charges, the insurer will add Re1 to the fund. After five years, the guaranteed addition increases to 3% for the next five years, 5% for the next five and 7% for the next five.

While it feels good to get a little extra, the loyalty additions alone can’t be the basis for buying the policy because these benefits may work out to be a small amount that may not significantly improve your returns.

What should concern you is the impact of costs in the policy. Sit with a benefit illustration that the insurer provides, look at the fund value on maturity and compare it with what other plans give to get a sense of how costs and loyalty additions impact your returns.

Keep in mind that when you stop paying premiums and the policy become paid-up—though it continues with reduced benefits—loyalty additions typically stop accruing.

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