Reversionary Bonus in Life Insurance: Simple, Compound, Vested and Terminal
Added every year, paid at the end. Here is how each kind of bonus works and where the money comes from.
A reversionary bonus is a bonus a life insurer adds to a participating (with-profits) policy, usually once a year, that is paid out later: when the policy matures or when a death claim is made. "Reversionary" means the money reverts to you at the end, not now. Once added, it stays attached to the policy.
Only participating policies get bonuses. IRDAI's Insurance Products Regulations, 2024 define par products as products whose policies are entitled to share in surplus (profits) during the term, as per Section 49 of the Insurance Act, 1938. A non-participating policy pays only what the contract fixes at the start.
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Types of Bonus at a Glance
Names vary by insurer. LIC, for example, calls its terminal bonus a Final Additional Bonus.
Simple reversionary bonus
When it is added
Declared each year after the valuation
When it is paid
On maturity or death claim
Calculated on
Sum assured only (LIC: Basic Sum Assured; HDFC Life's Super Income Plan: Sum Assured on Maturity)
Compound reversionary bonus
When it is added
Declared each year after the valuation
When it is paid
On maturity or death claim
Calculated on
Sum assured plus bonuses already attached
Interim bonus
When it is added
Not added; its rate is set at the annual valuation
When it is paid
On a claim that falls between two valuations
Calculated on
The rate set at the previous valuation
Terminal bonus (Final Additional Bonus)
When it is added
Not added in advance
When it is paid
Once, when the policy ends in a claim, by death or maturity
Calculated on
Usually a % of sum assured, as declared
| Bonus | When it is added | When it is paid | Calculated on |
|---|---|---|---|
| Simple reversionary bonus | Declared each year after the valuation | On maturity or death claim | Sum assured only (LIC: Basic Sum Assured; HDFC Life's Super Income Plan: Sum Assured on Maturity) |
| Compound reversionary bonus | Declared each year after the valuation | On maturity or death claim | Sum assured plus bonuses already attached |
| Interim bonus | Not added; its rate is set at the annual valuation | On a claim that falls between two valuations | The rate set at the previous valuation |
| Terminal bonus (Final Additional Bonus) | Not added in advance | Once, when the policy ends in a claim, by death or maturity | Usually a % of sum assured, as declared |
Simple, Compound and Vested Bonus
- Simple reversionary bonus
- A yearly bonus calculated on the sum assured alone, so the same rate gives the same rupee amount every year. HDFC Life's Super Income Plan states the rate as a percentage of the Sum Assured on Maturity, declared from time to time, with no guarantee on future rates. LIC's New Endowment Plan declares Simple Reversionary Bonuses annually at the end of each financial year.
- Compound reversionary bonus
- A yearly bonus calculated on the sum assured plus the bonuses already attached, so it grows on itself. Bajaj Allianz Life's Super Life Assure policy document defines it as a regular bonus rate expressed as a percentage of the Sum Assured and the Vested Bonus, added at the end of the financial year if all due premiums are paid.
- Vested bonus
- A bonus already added to the policy. The same Bajaj Allianz document defines Vested Bonus as the compound reversionary bonus already attached, based on rates declared in past years. LIC's brochure says Simple Reversionary Bonuses, once declared, form part of the guaranteed benefits of the plan.
- Accrued or attached bonus
- Other words insurers use for the same idea: bonuses declared so far and sitting on the policy until it pays out.
Worked Example: Simple vs Compound
Illustrative only. A ₹5,00,000 sum assured and a bonus rate of 4% (₹40 per ₹1,000) held steady for 10 years. Real rates change every year.
- 1
Simple, year 1
4% of ₹5,00,000 = ₹20,000 added.
- 2
Simple, year 2 onwards
Still 4% of ₹5,00,000, so ₹20,000 each year. After 10 years: ₹2,00,000 of vested bonus.
- 3
Compound, year 1
4% of ₹5,00,000 = ₹20,000, the same as simple.
- 4
Compound, year 2
4% of ₹5,20,000 (sum assured plus the ₹20,000 already vested) = ₹20,800.
- 5
Compound, after 10 years
₹5,00,000 × (1.04¹⁰ − 1) ≈ ₹2,40,122 of vested bonus, about ₹40,000 more than simple at the same rate.
- 6
At maturity
The policy pays the sum assured plus the vested bonus, plus any terminal bonus declared that year.
Terminal Bonus and Final Additional Bonus
A terminal bonus is a one-time bonus paid only when the policy ends in a claim. It is not added year by year, so there is nothing vested to lose or to surrender. IRDAI's Insurance Products Regulations, 2024 say terminal bonus or other forms of bonus, if any, become payable on the specified events or at the end of the policy term.
LIC calls it a Final Additional Bonus. Its New Endowment Plan brochure says it may be declared in the year the policy results in a claim, by death or maturity, at rates LIC declares, and that it is not payable under paid-up policies. Bajaj Allianz Life's Super Life Assure document pays a terminal bonus, as a percentage of the sum assured, only if the policy has completed ten policy years with all premiums paid. HDFC Life's Super Income Plan says terminal bonus may be declared at the company's discretion, based on experience.
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Interim Bonus
Bonuses are declared after each annual valuation. A claim that arrives part-way through the next year would otherwise miss that year's bonus. The interim bonus fills the gap. IRDAI's 2024 product regulations say interim bonus is declared at the annual valuation and becomes payable during the inter-valuation period.
Bajaj Allianz Life's document puts it plainly: on a death or maturity claim part-way through a financial year, or before the valuation result is declared, it pays an interim bonus at the rate decided at the previous valuation date. In the accounts, IRDAI's Revenue Account format shows "Interim Bonus Paid" as its own outgo line, next to benefits paid.
How a Bonus Is Declared
The rules that sit above any one insurer's bonus.
- check_circleSection 49 of the Insurance Act, 1938: no life insurer may declare a bonus to policyholders except out of a surplus shown in the valuation balance sheet, which comes from the actuarial valuation of assets and liabilities.
- check_circleThe same section bars topping up that surplus from a reserve fund unless the money was brought in through the Revenue Account on or before the valuation date.
- check_circleRegular (reversionary) bonus is declared only on an annual basis, under Schedule I of IRDAI's Insurance Products Regulations, 2024.
- check_circleIRDAI's 2024 actuarial, finance and investment master circular adds that proposed bonus rates should be capable of being sustained in future.
- check_circleA young insurer with a participating fund in deficit can still declare bonus, under strict shareholder-funding conditions, but only in its first twelve financial years. That route is explained on the final accounts page linked below.
- check_circleLIC's brochure notes its own allocation out of surplus follows the LIC Act, 1956.
What Happens to Bonus If You Stop Paying or Surrender
From IRDAI's 2024 product regulations and LIC's New Endowment Plan brochure.
Policy becomes paid-up
Bonuses already vested
Stay attached. IRDAI keeps a paid-up policy in force for the paid-up sum assured and subsisting reversionary bonuses
Future bonuses
Stop. LIC: a paid-up policy does not participate in future profits, and no Final Additional Bonus is paid
Policy surrendered
Bonuses already vested
Paid at their surrender value. IRDAI adds the surrender value of subsisting bonus to the guaranteed surrender value; LIC multiplies vested bonus by a bonus surrender factor
Future bonuses
None
Death claim
Bonuses already vested
Paid with the death benefit. IRDAI's products master circular says bonus becomes part of the death benefit if not paid earlier
Future bonuses
Interim and terminal bonus, if declared
Maturity
Bonuses already vested
Paid with the sum assured
Future bonuses
Interim and terminal bonus, if declared
| Event | Bonuses already vested | Future bonuses |
|---|---|---|
| Policy becomes paid-up | Stay attached. IRDAI keeps a paid-up policy in force for the paid-up sum assured and subsisting reversionary bonuses | Stop. LIC: a paid-up policy does not participate in future profits, and no Final Additional Bonus is paid |
| Policy surrendered | Paid at their surrender value. IRDAI adds the surrender value of subsisting bonus to the guaranteed surrender value; LIC multiplies vested bonus by a bonus surrender factor | None |
| Death claim | Paid with the death benefit. IRDAI's products master circular says bonus becomes part of the death benefit if not paid earlier | Interim and terminal bonus, if declared |
| Maturity | Paid with the sum assured | Interim and terminal bonus, if declared |
Exam Traps
Simple bonus is on the sum assured only; compound is on sum assured plus vested bonus. Reversionary bonus is paid at the end (maturity or death), not each year in cash. Terminal bonus is paid once, on a claim, and is not vested beforehand. Interim bonus covers a claim between two valuations. A bonus can come only out of valuation surplus (Section 49), never out of a reserve fund that bypassed the Revenue Account. Non-participating policies get no bonus at all.
FAQs
What is a reversionary bonus in life insurance?expand_more
A bonus added to a participating policy, usually each year, that is paid with the maturity or death benefit rather than in cash at once. Once added it stays attached to the policy.
What is the difference between simple and compound reversionary bonus?expand_more
Simple reversionary bonus is calculated on the sum assured only. Compound reversionary bonus is calculated on the sum assured plus bonuses already attached, so it grows on itself over the term.
What is vested simple reversionary bonus?expand_more
The simple reversionary bonus already declared and added to the policy. LIC's brochure says such bonuses, once declared, form part of the plan's guaranteed benefits, and they stay attached even if the policy becomes paid-up.
What is the difference between reversionary bonus and terminal bonus?expand_more
Reversionary bonus is added year by year and vests. Terminal bonus is a one-time amount paid only when the policy ends in a claim by death or maturity, and is not added in advance.
What is interim bonus?expand_more
A bonus paid on a claim that falls between two annual valuations, at the rate fixed at the previous valuation, so the policy does not miss that part-year's bonus.
Is reversionary bonus guaranteed?expand_more
Future rates are not. HDFC Life's Super Income Plan says no guarantee applies to future bonus rates. Once a bonus is declared and vested, it stays attached to the policy.
Where does the money for bonus come from?expand_more
From the surplus shown in the actuarial valuation balance sheet. Section 49 of the Insurance Act, 1938 forbids declaring a bonus from anything else.
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