Terminal Bonus in Life Insurance: Meaning, Calculation, and When It Applies

Bonuses are an important feature of participating life insurance policies and contribute to the long-term value of the policy. Among the different types of bonuses, the terminal bonus in insurance is a one-time benefit that may be payable at policy maturity or on a qualifying claim. 

Unlike bonuses that may be declared periodically, a terminal bonus is typically added only at the end of the policy term. It is generally associated with participating policies and is a key consideration when reviewing life insurance maturity benefits or comparing participating and non-participating insurance structures. 

What Is a Terminal Bonus in Life Insurance? 

A terminal bonus in life insurance is a one-time benefit that may be paid at the end of a policy term, either on maturity or on a qualifying claim. It is declared after assessing the insurer’s long-term financial performance and surplus and is offered to share par fund profits with policyholders. 

When Does Terminal Bonus Apply? 

A terminal bonus applies only in specific situations and is not guaranteed during the policy tenure. It is most commonly payable when a participating life insurance policy reaches maturity, provided the policy has remained in force for policy duration or till the end of premium paying term. 

A terminal bonus in insurance may also be payable on a death claim, subject to the policy terms and the insurer’s bonus declaration at the time of claim. In limited cases, insurers may allow this benefit on surrender, but rarely, and only after a substantial portion of the policy term has been completed. 

Terminal bonuses do not apply to non-participating policies and are typically not payable if the policy lapses early or is surrendered during the initial years. 

How Does Terminal Bonus Work in a Life Insurance Policy? 

In a participating life insurance policy, a terminal bonus functions as an additional benefit linked to the insurer’s participating fund. Over the policy tenure, insurers may declare regular bonuses. 

Unlike periodic bonuses, a terminal bonus in insurance is evaluated based on factors such as policy duration, the insurer’s surplus, and long-term par fund performance. If declared, it is added to the policy value along with accrued bonuses or Guaranteed Additions (GA), forming part of the claims or maturity benefits in life insurance. 

How Is Terminal Bonus Calculated? 

The terminal bonus calculation is assessed only at policy maturity or on a qualifying claim and depends mainly on the sum assured and the bonus rate offered by the insurer. One of these variables is decided by the policyholder, but the bonus rate is at the discretion of the insurer. 

It is a final "loyalty" addition, not necessarily an annual accumulation. The overall policy value and term influence the assessment, along with the insurer’s surplus from the participating fund. This surplus reflects long-term investment performance, expense management, and financial results. 

In India, the bonus is usually expressed as a percentage of the sum assured or as a rate per ₹1,000 of the sum assured, based on the total duration the policy was in force. 

A common, rudimentary formula for the bonus can be defined as: 

Terminal Bonus = [(Declared Rate)/(1,000)] x Sum Assured 

Terminal Bonus vs Other Bonuses in Life Insurance  

Participating life insurance policies may offer different types of bonuses, each differing in timing, structure, and certainty. A terminal bonus is assessed separately and depends on the insurer’s surplus and long-term par fund performance. This is why it is considered only at the end of the policy term and is not guaranteed. 

A reversionary bonus, by contrast, is usually declared periodically during the policy tenure. Once declared, it becomes part of the policy benefits payable at maturity or on a qualifying claim. Guaranteed additions differ further, as they are fixed benefits defined in advance under the policy terms. Understanding the meaning of accrued guaranteed additions is important, as they represent assured amounts added to the policy over time, regardless of fund performance. Here’s a summed-up version of the comparison: 

Conclusion 

A terminal bonus can enhance the final payout of participating life insurance policies at maturity or on a qualifying claim. While it is not guaranteed, it remains an important component of the overall benefit structure in long-term participating plans. 

At Bandhan Life, terminal bonuses form part of the broader participating framework of a life insurance policy, alongside other declared benefits that contribute to the final maturity value. 

Frequently Asked Questions 

1. Is the terminal bonus guaranteed? 

No. A terminal bonus is not guaranteed and is declared at the insurer’s discretion, based on factors such as policy duration, surplus availability, and par fund performance.

2. Is the terminal bonus in life insurance paid every year? 

No. A terminal bonus is a one-time benefit that may be payable only at policy maturity or on a qualifying death claim.

3. Does every life insurance policy offer a terminal bonus? 

No. Terminal bonuses are usually available only under participating (with-profits) life insurance policies. Non-participating policies do not include this benefit.