Accrued bonus

A participating life insurance policy does not tell the policyholder its exact return in advance. Instead, the insurer periodically adds a bonus to the sum assured, based on how the insurer performed.

In the early years, some policies pay a guaranteed bonus — a fixed percentage of the sum assured for the first few years, say five. After that period, the bonus becomes a reversionary bonus: declared once a year, at the insurer's discretion, and added to the sum assured. Once declared, this yearly addition is called the accrued bonus.

Accrued bonus is not paid out as cash every year. It is a running total, calculated annually and paid out only at the end — on maturity, or earlier if the insured dies during the term.

The mechanics, from the workbook:

• The bonus is calculated and declared every year, but the amount is not fixed at the start of the policy — it depends on the insurer's performance that year.
• On maturity, the payout is the sum assured plus all accrued bonus added up to that point.
• On death during the term, the payout is the sum assured plus whatever bonus had accrued up to the date of death — not the bonus for the full term.
• Reversionary bonus applies only to participating policies, which charge a higher premium than non-participating policies precisely because they carry this upside.
• To work out the effective return a policy is delivering once bonuses are folded in, the workbook points to the insurer's own official illustration, using Excel's RATE function (for a single lump sum at maturity) or XIRR (where payouts happen at different dates) — the official illustration is the only document that separates the guaranteed portion from the non-guaranteed portion, which includes accrued bonus.

Bonus rates below are illustrative; the workbook does not specify one.

For a Rs 1 crore sum assured, 30-year endowment policy, the workbook quotes an annual premium of Rs 3,16,332 — against just Rs 9,416 a year for an equivalent pure term (protection-only) policy on the same life. Almost the whole gap between the two premiums is going towards the savings and bonus component, not the risk cover.

Assume, for illustration only, the insurer declares an accrued bonus of 2% of the sum assured a year, every year from year 6 onward (after a 5-year guaranteed-bonus period). By year 20, roughly 15 years of 2% bonus have accumulated — about 30% of Rs 1 crore, or Rs 30,00,000 — added to the Rs 1 crore sum assured. If the insured dies in year 20, the nominee receives Rs 1.30 crore: the sum assured plus the accrued bonus declared up to that date, not the bonus for the full 30-year term.

Chapter 2 (Features of Life Insurance Products), section 2.3 — Calculating the inherent Return on Investment cum Insurance policies — introduces guaranteed and reversionary bonus, defines accrued bonus, and shows how RATE and XIRR are used against the official illustration to compute the real return. Expect a question distinguishing guaranteed bonus from reversionary/accrued bonus, and on what a death claim pays versus a maturity claim.

• Guaranteed bonus is fixed and time-limited (the early years); reversionary/accrued bonus is discretionary and runs every year after that.
• Accrued bonus is paid with the sum assured, not separately, and not annually in cash.
• On death, only the bonus accrued to date is paid — not a projection to the end of the term.
• Only participating policies carry reversionary bonus, and they cost more than non-participating policies for that reason.
• The official illustration, not a sales brochure, is the only source that separates guaranteed from non-guaranteed benefits.