Categorized | Life Insurance

Reversionary Bonus, a Complementary Benefit in Traditional Plans

Recently, the Insurance Regulatory and Development Authority (IRDA) of India brought out a few amendments in the selling of traditional life insurance Policy which is attractive and receptive for customers. What is more popular amongst these insurance products is the profit, in the form of bonuses that is declared by the insurance company and offeres as guaranteed Bonus to the customer or the insured.

Reversionary Bonus

When an individual opts for a traditional life insurance plan, they get to participate in the company’s fund from the date of the policy commencement and the policy tends to get share in the form of bonuses from the company. Hence, they are called participating insurance products. The reversionary bonuses are declared by the company time to time and payable at the time of the Claim or at maturity. It is declared in the form of percentages, which is applied to the total sum Insured on the policy, in view of the basic policy that is taken. The most common forms of reversionary bonuses are as follows:

1)Compound Reversionary Bonus

These types of reversionary bonuses are declared in the form of a percentage rate and are applied to the basic policy and adhere to the norms of the reversionary bonuses that are already in vogue as per the policy. Further, they are an accrued benefit that is compounded and they tend to increase due to the percentage of compounding.
2)Simple Reversionary Bonus

As the name suggests, simple reversionary bonuses are delivered at a percentage rate and directly applied to the sum that is insured as per the insurance policy.

For instance, a simple bonus is given at the rate of 5% to the amount of sum insured and a compounded reversionary bonus is given at the rate of 3.5%, which is accrued after a period of 20 years or so or at Maturity and the claim is made.

Terminal Bonuses

The residual bonus that is left after delivering the reversionary bonus is called as a terminal bonus. It relates to the residual amount that is left and is usually paid after the policy matures or during insurance claims.

Importance of Understanding a Recessionary Bonus

It is imperative that you understand the various concepts of reversionary bonuses that are being offered by the companies. There might be a policy that one might follow a simple one and the other might deliver a compounded one. Never be misled by rates that are projected and calculate well to understand how does the bonus affect your returns in the end. Further, when it comes to the choice between simple and compound, it depends on the insurer’s discretion and understanding to know the type of bonuses that fetches the best of the returns at the time of making the insurance claims or at the maturity.