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Do you know the LIC building was the tallest building in India when it was inaugurated in 1959?
LIC is the most profitable life insurance company in India and it is the largest and oldest too! Today let us discuss the ‘LIC Bonus’ process of the much revered LIC.
First Let’s see the different types of insurance products offered by the largest Insurance provider in India, Life Insurance Corporation (LIC).
The spread includes participating insurance products, non-participating insurance products, market-linked insurance products, term insurance products, health insurance products, and annuity and pension plans.
In this article, you will learn how the LIC Bonus is calculated and how the profit is distributed to the participating insurance policyholders
Table of Contents:
1.)Understanding The Philosophy of LIC Bonus
2.)What is a Participating insurance policy?
3.)How does the life insurance fund work?
- Role of Actuary
4.)How To Understand The Term “Annual LIC Bonus”
5.)Change in the Ratio of Policyholders and Shareholders
6.)Various Types of LIC Bonuses
- Simple Revisionary LIC Bonus – SRB
7.)Types of Additional Payout (LIC Bonus)
- Guaranteed Addition – GA
- Loyalty Addition LA / Final Additional LIC Bonus FAB
- LIC Bonus vs Others. How The Payment Differs?
- Who is not eligible for the LIC Bonus?
- Reduction of Mortality Charges
9.)LIC Bonus – Frequently Asked Questions
10.)Conclusion
Understanding The Philosophy of LIC Bonus
The general misconception about the Bonus is that it is regarded as a freebie and there is a sense of subservience attached to it in the mind of the receiver.
But our general understanding is flawed because the Bonus is a part of the surplus amount of money earned from “your” policy investment!
So next time when you are getting a Bonus keep your head held high!!
What Is a Participating Insurance Policy?
As a policyholder when you can take part with the insurance company, it’s called a “Participating Policy”. But, how it works?
Over a financial year, the company earns a profit. This profit is distributed to the policyholders. If you hold a Participating life insurance product, you receive a portion of the profit as a benefit.
Do you remember sharing sweets with your neighbors during a festival? In the same way, the insurance company shares its huge profits with the policyholders as an expression of sharing happiness.
Check out our holistic review of participating insurance policy LIC Jeevan Umang in the below link
LIC Jeevan Umang: Review (2023) – Should You Buy It?
How Does The Life Insurance Fund Work?
Life Insurance Corporation manages a fund named Life Insurance Fund. The premium collected from the policyholder is invested in this fund.
Out of all the policies, only a few policies will be filed for a claim.
Role of Actuary
A specialist called an Actuary (who assesses the risk) is appointed. He estimates the future death claim for the year based on the mortality rate.
How To Understand The Term “Annual Bonus”?
To meet the liability (death claim) the estimated amount is set aside from the fund. The excess surplus after setting aside the amount to meet the claims is declared as an “Annual Bonus”.
“Earlier to the IPO (May 2022), the Life Insurance Corporation paid 95% of its surplus to its policyholders while the remaining 5% to the government.”
LIC Bonus: Change In The Ratio – Policyholders and Shareholders
The government tweaked the LIC Act with the Finance Act, of 2021. And the result is,
“The Ratio of Policyholders and Shareholders is changed to 90:10 Respectively”.
Many investors flock to participating insurance policies just for LIC Bonuses. The LIC Bonus either accrues or is paid annually.
But these people forget a caveat!
They are not guaranteed and it varies year after year. The non-guaranteed portion of your benefit payout depends on the LIC Bonus declared each year.
Check out the LIC Bonus declaration of various LIC policies in the below link
https://licindia.in/Customer-Services/Bonus-Information
Now Let’s See The Various Types of LIC Bonus
1. Simple Reversionary LIC Bonus – SRB
It is declared for per 1000 Sum Assured. For example, Rs 25 per 1000 Sum Assured.
So, if your Sum Assured is ₹ 10 lakhs, then the SRB is ₹ 25000. This LIC Bonus is simply accumulated each year and finally paid at maturity or along with the death benefit.
A point to be noted is, in most cases, it is simply added to the Basic Sum Assured & paid finally without compounding.
Have you wondered what a Non-Guaranteed benefit/ LIC Bonus?
LIC has the right to skip the Simple Reversionary Bonus in any year, if there is no or limited surplus/profit. This is called a Non-Guaranteed benefit / Bonus.
Types Of Additional Payout (LIC Bonus)
2. LIC Bonus Guaranteed Addition – GA
As the name implies, it is Guaranteed i.e., a fixed amount which is added each year based on the type of policy.
The profit declaration has nothing to do with GA. A fixed LIC Bonus is paid irrespective of the profit declaration.
3. LIC Bonus Loyalty Addition LA / Final Additional Bonus FAB
LIC Bonus Loyalty Addition is paid at maturity or on death. This one-time Loyalty Addition Bonus is paid only if you pay the premium regularly without any default.
This is paid for staying with the policy for the specified term. It is paid with the surplus amount after paying the SRB.
The Fourth Type of LIC Bonus
There are also other LIC Bonuses apart from these three, some policy has Terminal Bonus / Interim Bonus. Mostly all these LIC Bonuses are similar or sometimes with slight changes in the terms and conditions.
Now let’s dwell on the heading of this article!
All You Need To Know about LIC’s Bonus
As an investor, there are a few points you should know before picking any traditional participating life insurance policy.
The sales pitch of these participating policies is that the LIC has declared a Bonus of 50,000 and odd crore for the previous year.
But do not get illusioned by the hefty numbers. Bear in mind the following caveats.
- The interest for any investment is calculated by multiplying the interest rate by the principal (Investment).
- The LIC Bonus is calculated based on your Sum Assured and not on the premium paid.
- In some cases, the LIC Bonus rate is high for higher policy terms and High Sum Assured.
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Warning! LIC Bonuses will NOT compound!
Under Bank FD or any other investment, the interest earned in the first years is compounded till maturity. But this is not the case with LIC Bonuses.
Most of the LIC Bonuses are not paid to you in hand immediately, they are accrued & paid at maturity or on death. It is declared each year & just added to the Basic Sum Assured without compounding.
Who Are Not Eligible For LIC Bonus?
Though LIC declares a Bonus each year, if you default on premium payment or surrender it before the policy term, then you are not eligible for the previous year’s LIC Bonus. What is the Surrender Value in LIC?
(Do you want to surrender an LIC policy but struggling to get the surrender form? Don’t worry it’s just a click away! Surrender Form of LIC)
You can receive LIC Bonus only if you pay all the due premiums without any default & stay with the policy for the full policy term (Except death).
“LIC Bonus is notional till you get it along the maturity benefit or death benefit”.
Since the primary objective of an insurance policy is providing life cover, the mortality charges are first deducted from the premium and then it is invested. The profit from the company will not be on par with other investment returns.
LIC Bonus – Frequently Asked Questions
i. What is an Accrued Bonus in LIC?
LIC Bonuses are calculated and added to all the eligible LIC policyholders after the fiscal year is over. The type and duration of the policy determine the LIC Bonus amount. In the LIC policy and in general, it is referred to as “accrued” once it is added.
ii.) How to Check LIC Accrued Bonus Information Online?
- Once you’ve logged into your account, click the “Basic Service” option. After that, select “Proceed.”
- From the menu that is displayed, select “Policy Status.”
- To view the current status of your accrued LIC Bonus, click the policy number you wish to check.
- Click the “Basic Information” page to check the accrued LIC Bonus in your policy.
iii.) When the LIC Bonus will be credited?
The LIC Bonus is announced at the end of every financial year. The LIC Bonus is credited only at the time of the policy’s final payment.
iv.) Is the LIC Bonus calculation based on Premium Paid?
The LIC Bonus is calculated based on your Sum Assured &and not on the premium paid.
v.) How LIC Bonus Rates are calculated?
The factors that affect LIC bonus rates are the Sum assured and Policy tenure. LIC Bonus is calculated for every 1000 rupees of Sum Assured. So, the higher the Sum Assured and Policy Tenure, the higher the LIC Bonus.
Conclusion
Traditional participating life insurance policies offer both insurance coverage and the potential to earn a LIC Bonus . These policies are also known as with-profits policies.
“The LIC Bonuses are not guaranteed and can vary based on the company’s financial performance and other factors”.
As a policyholder, please be cautious while reviewing the policy terms and conditions, including the illustrations provided by the insurer.
Get a thorough understanding of the potential benefits, risks, and costs associated with the policy.
When you calculate the return for these policies, it will be less than any debt instrument return. The reason for this is that insurance & investment are mixed up in these traditional policies.
As an alternative, the Pure Term Life Insurance Policy holds the best for your insurance portfolio.
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