Every life insurance policyholder pays regular or single premium to secure insurance protection against unforeseen events in life. In most of the cases the policyholder commits himself to regular payment of the instalment premium for a long duration to keep the contract with the insurer intact.
Any person would hope to get from the insurer an amount which is higher than the face value of the amount deposited, because the amount invested with the insurer must earn some return.
In order to take care of such expectations of the policyholders, insurance products are designed to offer an in-built benefit in terms of return on the premium collected and invested. It is known as a bonus that accrues annually to the policy account and becomes payable on maturity or death of the policyholder. The bonus accrues at declared rates on the basis of the sum assured and policy tenure; not on the basis of the amount of premium deposited with the insurer. Thus the prospective buyers of insurance must know how to earn maximum bonus with the same premium payment.
Avoid short-term endowment policies
Buying short term endowment policies must be avoided because under such policies the premium is very high and the sum assured is comparatively lower. The basis for calculating bonus is sum assured; hence for the same premium one must go for double the tenure which will provide almost double the sum assured. In such a case, the amount of bonus accrued per year will also be double of what it would be under the shorter duration policy.
For the same premium the risk cover will also be proportionately higher. This bonus is known as reversionary bonus and it is payable on maturity or on surrender of the policy and at death of the policyholder. On long-term policies, insurers also pay loyalty addition on maturity. This is how insurers compensate for the depreciation in the value of money over a long period of time.
Generally, insurers pay 20-35% of the sum assured as the loyalty bonus for policies with more than 25-30 years tenure. Hence, ensure loyalty addition to policy proceeds by choosing the right term.
Guaranteed addition under some endowment policies is yet another method of distributing profits among the policyholders. The product is so designed and priced that it yields sufficient profit for the insurers to pay a guaranteed addition to the sum assured every year by virtue of pre-determined bonus amount. The policyholders in lower age groups must opt for such policies. The advantage is that right at the beginning one comes to know how much one is to receive at maturity.
The writer is former MD & CEO, Star Union Dai-ichi Life