The bonus factor

Updated on Oct 01, 2007 08:45 PM IST

Traditional policies that are participatory in nature qualify for bonus payouts declared by insurance companies, writes Arnav Pandya.

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None | ByArnav Pandya

Every year insurance companies declare bonus. It is important to look at this factor from several angles as the final payout for different types of traditional policies will depend upon the bonus additions to the sum assured. It is important to understand the whole situation so that the benefits are calculated appropriately.

Nature of bonus

Bonus will be paid to the policy holders based on the profits made by the insurance company. The majority of the profit will be paid out only on the policies that will be eligible for the payout and thus the profit earned will decide the bonus amount. The performance of the insurance company will be the benchmark to understand the kind of bonus that will arise for the individual policy holder. Higher profits mean a better situation for the policy holders.

How it applies

The nature of bonus is such that it is applicable for certain policy holders only. Unit-linked policies are those policies where the policy holder bears the investment risk in the sense that the payout for them will be linked to the performance of the fund in which the money is invested. These policies have little in common with the bonus announcement.

Bonus is applicable for traditional policies where the option chosen by the policy holder is for profit, which means that the policy will be able to participate in the profit of the insurance company through the mode of bonus additions.

This restriction on bonus payout means that several new investors who have bought only unit-linked policies will be the ones who will not benefit from the bonus declared.

Base for calculation

The base for the purpose of calculation of bonus has to be understood because this will determine the extent of the benefit that is coming in for the investor. In most cases the base used for the purpose of calculation will be the sum assured so that when the bonus is declared, the person will have to use the rate applicable and then calculate the figure for the particular policy that he has based upon the sum assured and other factors.

There are policies that offer a different base for calculating bonus and if this is the case, then a separate understanding is required and the figure calculated accordingly.

Expressing the figure

The bonus figure is expressed as a rate per thousand. So when it is said that the bonus is Rs 50 per thousand, then the policy holder will have to calculate the figure applicable for their policy.

This means that if the sum assured in the policy is Rs 1 lakh, then the bonus calculated on this will work out to Rs 5,000 and this will be added to the entitlement and paid out at the time of maturity of the policy.

(The writer is a Certified Financial Planner)

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