Plans allow systematic enhancement of wealth with insurance
Investment plans, both endowment as well as money back plans are often called savings plans as they offer a guaranteed Maturity amount after the insurance Term is over. Often if calculated the growth over the insurance term, one may find it less than a ULIP (Unit Linked Insurance Plan) or Mutual Funds but for some, these are the ideal Risk free investments. They are safe, with no investment risk involved. You get the maturity amount at a fixed time. Insurance companies often talk of details like guaranteed additions, loyalty additions, and Bonus when talking about. But what are these and how are they calculated?
These additions are the profits earned by the insurance company during the year that are shared with the Policy holders.
Insurance companies guarantee bonus or this profit share every year. This is guaranteed percentage of the sum Assured that the insurance company has to pay for every Premium paid year, irrespective of the company performance. Guaranteed additions accumulate over the insurance term and are paid at the end, on maturity or along with death benefit, as the case may be.
Other than the guaranteed additions, insurance companies declare addition to the Sum Assured after one remains invested for a given minimum period of time. The percentage varies as per the performance of the insurance company. This is known as loyalty addition. It is paid for the number of years the premium has been paid. Often, insurance companies guarantee that they will pay the loyalty additions.
Bonus is declared by the insurance company at the end of the financial year. Just like other additions it is calculated on the sum assured. The percent bonus declared depends upon the performance of the insurance company in past financial year. Most insurance companies put a condition that the bonus will be paid after first two years or three years of the insurance. Unlike other additions explained earlier, the bonus may not be declared every year. This is entirely performance based addition.
Any additions accumulated over a period of time are given on the maturity of the policy or as a part of Death Benefit to the Beneficiary of the insurance policy. Bonuses and additions add value to the investment plan and increase the guaranteed maturity amount or the sum assured. An important thing to know is that additions simply accumulate in the policy and do not compound over the time.