Life insurance serves as a crucial financial tool, providing peace of mind and financial security for individuals and their families. One of the lesser known but significant aspects of life insurance policies is the reversionary bonus. This bonus can enhance the value of a policy over time, offering additional benefits to policyholders. In this article, we will delve into the concept of reversionary bonuses, explain how they work, and explore the different types of bonuses offered in life insurance.
Which life insurance policies offer bonus?
Many traditional life insurance policies—especially participating (with-profits) plans—offer bonuses. These include endowment plans, whole life insurance, and some money-back policies. Bonuses are a great way to grow your policy’s value over time and reward long-term policyholders.
What is a life insurance bonus?
A life insurance bonus is an extra amount added by your insurer to your policy benefits—over and above your guaranteed sum assured. Think of it as a reward for staying invested and choosing a participating policy. It’s usually declared annually based on the insurer’s profits and your policy’s performance. Bonuses are not paid out immediately but are added to your maturity or death benefit, enhancing your total payout over time. These can be in the form of reversionary bonus, terminal bonus, or loyalty bonus, depending on your policy type.
What is a reversionary bonus in life insurance?
A reversionary bonus in life insurance is an additional benefit declared by the insurance company to a participating policy. It is typically added to the sum assured and is payable upon the maturity of the policy or the death of the policyholder, whichever comes first. The reversionary bonus accumulates over the policy term, boosting the overall value of the insurance coverage.
Unlike other bonuses that might be paid out periodically, reversionary bonuses are not paid out immediately. Instead, they are added to the policy's sum assured and accrue over time. This means that the policyholder benefits from the compounded growth of the bonus, resulting in a more substantial payout when the policy matures or when a claim is made.
Different types of bonuses offered in life insurance
Life insurance policies can offer various types of bonuses, each with its unique features and benefits. Here are the main types of bonuses:
1. Reversionary bonus:
Simple reversionary bonus: This is the most common type of reversionary bonus. It is declared annually by the insurance company and added to the policy's sum assured. The bonus amount is typically a percentage of the sum assured and does not change once declared.
Compound reversionary bonus: Unlike the simple reversionary bonus, the compound reversionary bonus is added to the sum assured and any previously declared bonuses. This means that each year's bonus is calculated on a progressively increasing base, leading to potentially higher payouts.
2. Terminal bonus:
This bonus is a one-time addition to the policy's value, usually paid out at the end of the policy term or upon the death of the policyholder. It is typically declared at the discretion of the insurance company and can significantly enhance the final payout.
3. Cash bonus:
Cash bonuses are paid out annually to policyholders as cash instead of being added to the sum assured. This provides immediate financial benefit to the policyholder, though it does not compound or accumulate over time.
4. Interim bonus:
An interim bonus is declared for policies that are terminated before the next bonus declaration date. This ensures that policyholders who surrender their policies or who die before the next bonus declaration still receive a fair share of the accrued bonuses.
