What is a Reversionary Bonus?
In life insurance and endowment policies, a reversionary bonus (often called a reversionary addition) is an extra amount that the insurer adds to the policys sum assured each year. Unlike a terminal bonus, which is paid only at maturity or death, a reversionary bonus is declared annually and becomes a permanent part of the policys guaranteed benefit.
The bonus is expressed as a rate per 1,000 or $1,000 of sum assured and is usually quoted in rupees or dollars per thousand. For example, a reversionary bonus of 40 per 1,000 sum assured means the policy will receive an extra 40 for every 1,000 in the base sum each year.
How Reversionary Bonus Rates are Determined
Insurers consider several variables before announcing a reversionary bonus rate for a given policy year:
- Investment Returns: The primary source of funds for bonuses is the insurers investment portfolio. Higher market yields allow higher declared bonuses.
- Mortality Experience: Better-thanexpected survival rates reduce claim outgo, leaving more surplus for bonuses.
- Expense Management: Efficient administration can free up resources for bonuses.
- Regulatory Guidance: Some jurisdictions require minimum bonus levels to protect policyholders.
- Policy Type: Traditional participating policies usually have higher rates than unitlinked plans, which allocate returns directly to the policyholder.
Most insurers announce a provisional bonus rate each fiscal year, which becomes final at the end of the policy year. The rate is applied to the policys sum assured for that year and is then locked in for the remainder of the contract.
Impact on Policyholders
Reversionary bonuses influence the overall value of a participating policy in several ways:
- Growth of Guaranteed Benefit: Each years bonus adds to the total sum assured, increasing the payout at maturity or death.
- Liquidity: Some policies allow partial surrender of the accumulated bonuses, giving policyholders access to cash without breaking the contract.
- Tax Implications: In many jurisdictions, accrued bonuses are taxfree until the policy is realized (maturity or claim).
- Policy Comparison: A higher cumulative reversionary bonus can make a seemingly lowerpriced policy more attractive over the long term.
Sample Calculation
Assume a life insurance policy with a sum assured of 500,000 and a declared reversionary bonus of 45 per 1,000 for the first three policy years. The calculation proceeds as follows:
Bonus = (500,000 1,000) 45 = 22,500
New guaranteed amount = 500,000 + 22,500 = 522,500
Bonus = (522,500 1,000) 45 = 23,512.50
New guaranteed amount = 522,500 + 23,512.50 = 546,012.50
Bonus = (546,012.50 1,000) 45 = 24,570.56
New guaranteed amount = 546,012.50 + 24,570.56 = 570,583.06
After three years, the policys guaranteed benefit has risen from 500,000 to approximately 570,600, solely because of reversionary bonuses.
Illustrative Table of Bonus Accumulation
| Policy Year | Base Sum Assured () | Bonus Rate (/1,000) | Bonus Earned () | Total Guaranteed () |
|---|---|---|---|---|
| 1 | 500,000 | 45 | 22,500 | 522,500 |
| 2 | 522,500 | 45 | 23,513 | 546,013 |
| 3 | 546,013 | 45 | 24,571 | 570,584 |
| 4 | 570,584 | 40 | 22,823 | 593,407 |
| 5 | 593,407 | 40 | 23,736 | 617,143 |
The table also shows a possible reduction in bonus rate (from 45 to 40) that insurers may apply in later years, reflecting market conditions.
Frequently Asked Questions
1. Are reversionary bonuses guaranteed?
They are guaranteed once declared. The insurer may revise the provisional rate each year, but once a bonus is added to the policy, it cannot be withdrawn.
2. Can I choose a higher bonus rate?
No. The rate is set by the insurer for all participating policies of the same class. Policyholders cannot influence it.
3. How does a terminal bonus differ?
A terminal bonus (or final additional bonus) is paid only at the time of claim or maturity, and its amount is determined after the policys entire experience is assessed.
4. What happens if the insurer declares a zero bonus for a year?
The policys guaranteed benefit remains unchanged for that year, but any previously accrued bonuses stay intact.
5. Do reversionary bonuses affect loan values?
Yes. When a policy is used as collateral, lenders typically consider the total guaranteed amount, which includes accrued reversionary bonuses.
Key Takeaways
- Reversionary bonuses are annual additions that become a permanent part of a policys sum assured.
- The rate is expressed per thousand of sum assured and varies with insurer performance and market conditions.
- Once a bonus is declared, it cannot be removed, and it directly enhances the policys maturity or death benefit.
- Understanding the historical bonus pattern of an insurer helps in evaluating the longterm value of participating policies.
