What are “With–Profit” Life Insurance Policies?

Published by Sharekhan Education | June 18, 2021

What are “With–Profit” Life Insurance Policies?

Umang was browsing few insurance portals to select a life insurance policy to cover his needs, when he noticed that a few of the comparable policies had higher premiums than the others for exactly the same amount of cover that he was choosing. Why is this so he thought? On closer look he saw that the policies charging a higher premium were “With –Profit” policies and were paying a few bonuses at maturity, while the others were not. Two terms that Umang was curious to know more about were “Bonus” and “With-Profit Policy”.

In this article let us try to understand the “With-Profit” policies and a take an overview of Bonuses. In our upcoming article we can discuss more about bonuses and get to know them better.

What are “With-Profit” policies?

In life insurance, participating policies or with-profit policies are entitled to share in the company’s profits. The premium (net of expenses) that you pay for a life insurance policy is invested as per IRDA norms to generate profits. According to insurance norms 90% of this profit is to be shared with the “with-profit” policy holders as bonuses.

A bonus is usually an additional amount which gets accrued or attached to the policy on a yearly basis.  This is paid upon the death of the life assured, surrender or at maturity of the plan, whichever happens earlier. The rates of bonus are discretionary for the insurance company, varying with the profits earned, and not fixed.

With-profit policies are entitled to bonuses; which means that if you want to participate in the profits of the policies you will have to pay a price for it. For the benefit of participating in bonuses the insurance company recourses to bonus loading in the premiums; which can be quite an amount of the total premium. So to buy a participating policy you have to pay up a higher premium than the non-participating policy for a similar coverage; as is the case with Umang in the above example.

Types of Bonus:

Bonuses are generally of four type’s viz. Reversionary Bonus: Simple & Compound Reversionary Bonus, Terminal Bonus, Interim Bonus and Cash Bonus. It would be wise to note here that you will not get all four in a single policy but there could be more than one type of bonus that could accrue to your policy. These bonuses hike up the maturity value of your policy and it is therefore good to know them at inception.

To wrap it up, we can say that ‘with-profit’ policies participate in the profits of the company and distributes this profit to its policy holders as bonuses. But do remember that there are no free lunches in this world, to enjoy the profits (bonuses) distributed by the company you will have to pay a higher cost.

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