I recently heard that insurance companies provide bonuses as well. Is this true?

Yes, insurance companies do offer bonuses to their policyholders. Bonuses are nothing but extra payments received over and above the assured income. In life insurance, you are entitled to the sum assured and in certain cases, over and above that there may be bonus payments, too.

So, when a life insurance company makes a profit, it is supposed to distribute a part of that profit to its policyholders. This is done in the form of bonus payments. However, not all life plans are eligible for bonus. Plans can either be participatory, thereby qualifying for bonus, or non-participatory, that do not qualify for bonus. This is why non-participatory policies come at a lower premium compared to participatory plans.

Do note that bonus is different from guaranteed addition (GA). The bonus depends on the insurer’s profit while GA is an assured addition to the policy and is disclosed upfront.

A few more factors to bear in mind with regards to bonuses:

- It (bonus) depends on the quantum of investment gains of the ‘with profit’ fund either as a certain amount per Rs. 1,000 sum assured, or as a percentage of the sum assured.

- In most traditional life policies, the bonus amount keeps getting added to the policy and keeps accumulating till the policy’s maturity. This is called reversionary bonus.

- Terminal bonus is added on maturity of policy or on death of the policyholder. It is a one-time bonus that the insurer declares for policyholders who keep the policy till its maturity.