• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Compare Online Insurance Plans in India - MintWise

Term Insurance, Travel Insurance, Student Travel and Medical Insurance, Health Insurance, Cancer Insurance, Critical Illness Insurance

  • Product Quotes
    • Term Insurance
    • Health Insurance
    • Motor Insurance
    • Student Insurance
    • Critical Illness Insurance
    • Personal Accident Insurance
    • Cancer Insurance
    • Resume Application
  • Blog
  • IRDA Compliance
    • License
    • Privacy Policy
    • Terms of Use
    • Disclaimers
    • User Content Policy
    • All from Legal
  • General Topics
  • Insurance Industry

LIC Traditional Life Insurance Policies – How the Bonuses add up

LIC traditional life insurance policies bonus
  • Author

    MintWise

  • Date

    September 13, 2014

LIC traditional life insurance policies bonusYou must read this if you have a traditional LIC policy, the one that gives bonuses every year.
 
LIC has sold more than 25 crore policies till date, and it is very likely that you as well, have a policy. What is also likely is that your policy is a traditional life insurance policy, because it is the most predominant type sold by LIC agents. For whatever reason you bought it, what is also probable is that you are looking to find out what are the returns you get from a traditional LIC life insurance policy. This article explains exactly that – the kind of bonuses that you get in a traditional LIC life insurance policy and how they all add up to give you returns.
 

Please note these points before you read further.

  1. We are not calculating returns in the case of death, in this example. Only in the case of policy end (maturity).
  2. Traditional policies here mean those which give returns and are not Unit-Linked. You get bonuses every year (but they get accrued and are not paid out every year) and finally all the bonuses are paid out when the policy matures.
  3. There are variants in traditional policies. Money-back traditional policies work similar to the example here, but additionally give payout in between in fixed intervals. Whole life policies have yet another payout on death as well.
  4. This is applicable for traditional policies of all life insurance companies, not just LIC of India.

 

Term Insurance of   1 Crore with 55% Savings
@ just Rs. 5,728 / year*
DATE OF BIRTH
SMOKING / TOBACCO
Yes No
GENDER
Male Female
* for a healthy 25-yr old Non-smoker Male for 25 years.


 
Here is an example to explain the types of bonuses declared for traditional life insurance policies.
 
Let us assume that Prakash, a 25-year old male from Gurgaon bought a traditional life insurance policy from LIC. His agent told him that he needs to pay Rs. 26,774 every year for 16 years. The policy has a life insurance cover of Rs. 5 lakhs and is valid for 25 years. Let us look at the benefits he will get. (Please note that this is a hypothetical case and the real benefits will depend on what exactly are the features in the real policy.)
 
There are commonly 3 kinds of ways in which a traditional policy can benefit you. Depending on the policy itself, you may get any combination of these benefits. Check your policy document to know which ones are applicable.
 
1. Guaranteed Additions : If your policy is eligible for Guaranteed Additions, you will know when you buy it. It is mentioned in the policy document itself. It is absolutely guaranteed and you can calculate the benefit right in the beginning of the policy period. It is given not for every policy year, but only for the first few years of the policy.
 
GA is declared as a number or % of Sum Assured. In our example above, it GA of 3.5% of Sum Assured payable for first 4 years, then you would get Rs. 5,00,000 x 3.5% = Rs. 17,500 for the first 4 years of the policy.
 
Remember that while GA is computed and pre-declared, you don’t really ‘get’ it, i.e. it does not come to you as a cheque or go into your bank account. It just stays with LIC in your policy account. It is then paid to you when the policy matures. Important to note here that this amount does not grow. So the bonus that you get for the year is exactly the amount that is declared without earning any interest whatsoever.
 
Refer to the image below. GA is shown are red arrows for the first few years. But notice that it is paid out only at maturity (or at death if that happens before policy maturity).
 
Bonus from LIC Traditional Policies
 
2. Bonus (or Simple Reversionary Bonus) : LIC deposits your premium money into Govt. bonds of varying guaranteed interest rates. Depending on the combination of interest rates, LIC declares a bonus for each year for each kind of policy and depending on the term of the policy. Like Guaranteed Additions, bonus is declared not as a % of your premium but as a rate on your Sum Assured. Say, in our example, LIC may declare a bonus of Rs. 45 per Rs. 1,000 Sum Assured for the year. That simply means that you will get Rs. 45 x (Rs. 5,00,000 / Rs. 1,000), i.e. Rs. 45 x 500 = Rs. 22,500 as bonus. This amount could be Rs. 48 per Rs. 1,000 Sum Assured, for the next year, which translates to a bonus of Rs. 24,500. And so on for each year.
 
Bonus is generally paid on all traditional policies of life insurance companies, including LIC. It is shown as blue arrows and is declared every year. Bonus is also accrued and not paid immediately. Once declared that amount is guaranteed, but it does not grow till maturity – it is a fixed amount and paid at policy maturity.
 
3. Loyalty Addition or Loyalty Bonus or Terminal Bonus or Final Additional Bonus or Final Maturity Bonus : As mentioned in point 2 above, LIC keeps declaring a bonus and once declared, that amount is guaranteed. But sometimes, the returns from the investments are higher that what is declared – in such cases, LIC shares the additional gains in the form of Loyalty Addition. It is applicable only in the final year of the policy and is based on your policy, term and the year. Generally, higher policy term will have higher Loyalty Addition.
 
In our example, Loyalty Addition of, say, Rs. 55 per Rs. ‘000 Sum Assured would mean a one-time amount of Rs. 55 x (Rs. 5,00,000 / Rs. 1,000), i.e. Rs. 55 x 500 = Rs. 27,500.
 
Loyalty Addition is depicted as a single blue arrow in the figure above. It is paid to you on maturity of the policy along with all other benefits such as Sum Assured, Guaranteed Additions and Bonuses for each year.
 
So here’s a summary for a possible traditional policy.
 
Returns and Bonuses from a traditional LIC policy
There is a gross return of 4.95% on the policy above. When you calculate this for your own policy, remember to check if GA, Bonus and Loyalty Additions are all applicable or not.
 
For all life insurance companies, the rate of return from a traditional life insurance policy is generally low, however you can rest assured that your premium money is 100% safe since these policies can invest their money only in secure Govt. bonds and Govt. Securities. They cannot invest it in the stock market. Hence returns are generally in the range of 4.5% – 7% net of tax, which for many may not look satisfactory. Of course, there is the life insurance cover that is associated with such a policy, but the cover itself is generally about 10-20 times the premium, which is obviously not adequate. For life insurance cover, we recommend only term insurance plans.
 
All in all, traditional policies like these are recommended only for those who need to be pushed for discipline in their savings, and not for the others.
 

To connect with one of our Trained & Certified Insurance Counselors, please call our Customer Care No. +91 1800 2121 344


Related Posts

  • Nomination-in-life-insurance
    Nomination in Life Insurance – Great benefits from the New Rules
  • Section 80DD Deduction Limit for Expenses and Maintenance of Disabled
    Section 80DD Deduction Limit – Expenses & Maintenance of Disabled
  • Section 80D Tax Benefits
    Section 80D – Get Tax Benefits on Health & Medical Insurance

6 thoughts on “LIC Traditional Life Insurance Policies – How the Bonuses add up”

  1. MintWise says:
    September 22, 2014 at 1:35 AM

    Adithya, like many buyers of traditional life insurance policies, you also seem to have an expectation mismatch in returns from such plans. It is valid. We have discussed this in detail in two articles published today. The links are below. Do go through them and let us know if you have any further query.

    https://www.mintwise.com/blog/life-insurance-policy-surrender-paid-up-2/
    https://www.mintwise.com/blog/life-insurance-policy-surrender-paid-up/

  2. MintWise says:
    September 22, 2014 at 1:35 AM

    Adithya, like many buyers of traditional life insurance policies, you also seem to have an expectation mismatch in returns from such plans. It is valid. We have discussed this in detail in two articles published today. The links are below. Do go through them and let us know if you have any further query.

    https://www.mintwise.com/blog/life-insurance-policy-surrender-paid-up-2/
    https://www.mintwise.com/blog/life-insurance-policy-surrender-paid-up/

  3. adithya says:
    September 20, 2014 at 12:22 PM

    Thanks for detailed explanation. I have jeevan anand policy of sum assured 11 lacs with 20 year term and annual premium of 52 k. I started this from last year . After reading your articles on term insurance , i feel its waste of my money.
    Now i have two options..
    1. stop paying premium (loss @52k )..
    2. paid up the policy after 3 years.( i dont know how much i get with paid up)

    please suggest which option is good for me. Looking forward for your replay.

  4. adithya says:
    September 20, 2014 at 12:22 PM

    Thanks for detailed explanation. I have jeevan anand policy of sum assured 11 lacs with 20 year term and annual premium of 52 k. I started this from last year . After reading your articles on term insurance , i feel its waste of my money.
    Now i have two options..
    1. stop paying premium (loss @52k )..
    2. paid up the policy after 3 years.( i dont know how much i get with paid up)

    please suggest which option is good for me. Looking forward for your replay.

  5. Keshav Ahluwalia says:
    September 14, 2014 at 2:47 PM

    very clear explanation. i have a jeevan anand policy which i took from my agent in 2008, but i did not know how to calculate returns. this article really helps.

  6. Keshav Ahluwalia says:
    September 14, 2014 at 2:47 PM

    very clear explanation. i have a jeevan anand policy which i took from my agent in 2008, but i did not know how to calculate returns. this article really helps.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar

What are you looking for?

SAVE!!!
Term Insurance
of   1 Crore - 55% Off!
@ just Rs. 5,728 / year*
DATE OF BIRTH
SMOKING / TOBACCO
Yes No
GENDER
Male Female
* for a healthy 25-yr old Non-smoker Male for 25 years.

Recent Posts

  • claim-settlement-ratio-irda-2019-2020Claim Settlement Ratio for Term Insurance by IRDA : 2020-2021
  • Family ProtectionThe Best Term Insurance Plans of 2022
  • claim-settlement-ratio-irda-2019-2020Claim Settlement Ratio for Term Insurance by IRDA : 2019-2020
  • Group Health InsuranceGroup Health Insurance (GHI) made Mandatory for Employers
  • important of term insuranceThe Importance of Term Insurance

Copyright © 2023 · Genesis Sample on Genesis Framework · WordPress · Log in

1800 2121 344

Mon - Sat: 10 AM TO 7 PM

info.mintwise@platinumone.co.in

Email Us

Live chat

Mon - Sat: 10 AM TO 7 PM

+91 86526 45424

WhatsApp 24 x 7

Insurance is the subject matter of the solicitation.

Product and related information like Claim Settlement ratios displayed on www.mintwise.com is based on the information received from the Insurers and/or as published by the IRDAI, the Insurance Regulator.

Corporate Office : PlatinumOne Insurance Broking Private Limited, Unit No. 907, 9th Floor Lodha Supremus II, Plot No. F-4 & F-4/1, Rd No.22, Wagle Estate, Thane (West), Thane 400 604, Maharashtra, India.