When traditional life insurance products involve a 'with profit policy' or 'participating policy' clause, it means the policyholder is eligible for a bonus. The bonus is declared out of the surplus determined after the actuarial valuation of the assets and liabilities of the life insurer. The bonus shows the profitability of the insurance company.
Bonus is declared as a proportion of the sum assured, paid as a lump sum, either on maturity or to the family upon the death of the insured.
Insurers invest a portion of the premiums collected under the investment-linked plans and these are regulated by the Insurance Regulatory &Development Authority (Irda). Typically, a major portion of the corpus is invested in government-secured debt instruments, with a very small percentage in equity.
How do life insurers calculate the bonus?
There are two methods of calculating bonus on life insurance policies. The bonus is added to the sum assured. For example, the sum assured is `1lakh and the bonus declared is five per cent or `50 per thousand of the sum assured. This will increase the sum assured to `105,000. If another bonus of five per cent is declared, the sum assured will be 110,000 lakh.
When is the bonus paid?
The final bonus accrues in your account and is mostly paid on the completion of the policy term. Interim bonus is paid between two annual bonus declarations. Policies that mature or are claimed during the financial year, are paid interim bonus for the period starting from the end of the preceding financial year end till the date of maturity or claim. The policyholder may be allowed to encash the bonus on declaration. Or, it may be used to reduce subsequent premiums.
Who should buy 'with profit' policies?
First, a term insurance plan provides you maximum cover at affordable premiums. At the same time, it only provides death benefit, that is, claim is payable only in the event of death of the insured during the policy term. If you survive the policy term, you don't get the premium back.
If you are one of those who seek returns from insurance plans, you should opt for investment linked plans like money back or endowment, where you get a part of the profit as bonus. However, you will have to shell out extra money as the premiums for these plans are higher than pure life or term plans.
