Going by the literal definition Bonus is always an attractive offer everybody would be interested in. When defined in terms of your life insurance policy, it is the extra amount of money which gets accumulated in any insurance policy on a yearly basis and which will be paid to the policyholders as a maturity benefit at the end of policy term or in case of death of the policy holder. Maturity benefit is primarily the sum assured of the policy and bonus is always in addition to it.
Over the years Life Insurance Corporation of India has one the most popular insurance provider who has been issuing bonuses to its policyholders in their traditional life insurance plans. In fact recently LIC announced a onetime bonus for policies in force as of March 31, 2016 and existing on or after September 1, 2016 .The bonus ranged from Rs5 to Rs.60 for every Rs.1000 of sum assured depending on the term of the policy. So in case if you have policy with Rs.4 lacs as it sum assured then as per the newly announced bonus the amount works out to be Rs.2000 or Rs. 24000 respectively which would be added to the sum assured value of the policy and the benefits of which would be enjoyed by the policyholder after completion of the policy term.
The way by which these bonuses works in your life insurance plan they are reversionary in nature, which means the amount get accrued to the policy till the maturity of the policy or till the policyholder’s death. The reversionary nature of the bonuses can be in simple or compounded format. In case of simple reversionary bonuses, the bonus get added to each policy year is fixed whereas in case compounded the previous years outstanding is also considered while calculating the bonus for each policy year. Other than the regular bonuses insurance providers also issue terminal bonuses which are always paid at the end of the policy term. Though all the bonuses issued during the policy term make a policy very attractive, as it might increase the IRR of the policy by at least 2% but it shouldn’t be the factor while buying a life insurance policy. Few things to look into in case of bonuses:
Keeping all these things in mind bonus is really an effective tool to increase the internal rate of your policy. Once a bonus is declared the corresponding revival cost of the policy also increases. But one thing that need to be kept in mind is that the amount of bonus by a policy in previous year should not be considered as benchmark for future bonuses and you should not make your policy buying judgment based upon it.