Bonus Rate (Insurance)
In the context of participating life insurance policies, the bonus rate is the addition to the sum assured (or fund) declared by the insurer from surplus profits, comprising a reversionary bonus declared annually and a terminal bonus payable at maturity or death.
Traditional participating (or 'with-profit') life insurance policies in India — primarily endowment plans, money-back plans, and whole life plans — accumulate value not only through the guaranteed sum assured but also through bonuses declared by the insurer. Understanding bonus mechanics is essential for evaluating the actual returns delivered by these products, particularly those sold by LIC, which has the largest participating portfolio in the world.
A simple reversionary bonus is a fixed amount added per Rs 1,000 of sum assured each year, declared annually by the insurer's board based on actuarial surplus calculations. For example, if a policy has a sum assured of Rs 10 lakh and the reversionary bonus rate is Rs 40 per Rs 1,000, the addition for that year is Rs 40,000. Once declared, a simple reversionary bonus vests with the policyholder — it cannot be taken back — and the accumulated bonus is payable along with the sum assured at maturity or upon death claim.
A compound reversionary bonus works similarly but applies the declared rate to the sum assured plus previously accumulated bonuses, producing a compounding effect over time.
A terminal bonus (also called a loyalty addition or final additional bonus) is a discretionary, one-time addition paid at the time of maturity or death claim. It is not guaranteed and is declared based on the actual investment performance of the participating fund over the policy's lifetime. LIC's terminal bonuses for long-duration policies (20–30 years) have sometimes been substantial, significantly improving the overall return for policyholders who stay the full term.
Bonus rates for LIC are set by the LIC Board after actuarial review and government consultation (given the government's ownership). LIC's participating fund invests primarily in government securities, state development loans, bonds, and equities. The equity component — which has grown as a share of the portfolio — generates a significant portion of the surplus from which bonuses are funded.
From a policyholder perspective, the effective internal rate of return (IRR) of a participating traditional policy depends on: the guaranteed sum assured, the accumulated reversionary bonus, the terminal bonus at claim, and whether the policy is surrendered early. Full-term holders typically receive materially better effective returns than early surrenders, which reflects the policy's long-term design.