Introduction

When choosing a life insurance policy in Nepal, you may come across broadly four terms: bonus rate, reversionary bonus, terminal bonus and guaranteed addition. But do you actually know how do bonuses work?

In Nepal, many insurers do not clearly understand how bonuses work. Some assume that a bonus is a yearly cash payment, while others mistake the declared bonus rate for an interest rate or guaranteed investment return. First let’s understand what a Life insurance bonus is

What Is a Life Insurance Bonus?

A life insurance bonus is usually an additional amount added to the benefits of an insurance policy. It is generally payable upon maturity, death or another event specified in the policy

Here, the policy is generally associated with a participating or with-profit life insurance plan. The bonus is generally added to the policy’s basic sum assured. It may become payable under following conditions:

The policy reaches maturity;
The insured person dies during the policy term; or,
A specified survival benefit becomes due

A bonus is not necessarily paid into the policyholder’s bank account every year. In most of the conventional life insurance policies, it accumulates within the policy and is paid later according to the contract.

What Is a Participating/Profit Life Insurance Policy?

A participating life insurance policy is a policy that may receive a share of the surplus generated by the insurer’s participating fund.

This surplus in the fund may arise from several sources such as investment performance, actual claim experience, policy lapses, revivals, paid-up policies and surrenders may affect the insurer’s financial commitment towards insurers.

After assessing its assets, liabilities and long-term commitments, the insurer may distribute part of the available surplus to eligible policyholders as a bonus.

Do All Life Insurance Policies Receive Bonuses?

No. Bonus eligibility depends on the policy type and its terms.

Policies that may receive bonuses	Policies that may not receive bonuses
Endowment Policies Whole-life Policies Child Policies Money-back Policies Similar traditional life insurance policies	Pure term life insurance Non-participating policies Certain microinsurance products Unit-linked policies with investment-unit structures Plans offering only predetermined benefits

Policies that may receive bonuses

Policies that may not receive bonuses

Endowment Policies

Whole-life Policies

Child Policies

Money-back Policies

Similar traditional life insurance policies

Pure term life insurance
Non-participating policies
Certain microinsurance products
Unit-linked policies with investment-unit structures
Plans offering only predetermined benefits

Note: The policy document should clearly mention whether the plan is participating, with-profit, non-participating or without-profit.

Where Does the Life Insurance Bonus Come From?

Life insurance companies collect premiums from a large number of policyholders. These premiums are used to:

Pay death and maturity claims;
Maintain reserves for future liabilities;
Cover operating and distribution expenses;
Invest in permitted assets;
Meet solvency requirements; and
Administer policies over many years.

Life insurance is a long-term business. Before declaring a bonus, an insurer must consider both its current financial position and investments it needs to make now in order to cover claims during crisis in future. An actuary evaluates the insurer’s life fund, assets, expected claims, expenses and future obligations and revises the bonus rates accordingly.

How Is a Bonus Rate Commonly Expressed?

In Nepal, life insurance bonus rates are commonly expressed as an amount per NPR 1,000 of sum assured.

For example:

Bonus rate: NPR 60 per NPR 1,000 of sum assured per year

This means NPR 60 may be added for each NPR 1,000 of the applicable sum assured for the eligible year.

It does not automatically mean that the customer earns a 6% return on the premium paid.

Simple example

Suppose a policy has:

Basic sum assured: NPR 10,00,000
Declared bonus rate: NPR 60 per thousand

The estimated bonus for one eligible year would be:

NPR 10,00,000 ÷ 1,000 × NPR 60 = NPR 60,000

The calculation is based on the sum assured, not directly on the annual premium.

Is the Bonus Guaranteed?

The answer depends on the type of benefit.

Future Reversionary Bonuses	Terminal Bonuses	Guaranteed Addition	Previously vested bonuses
Generally, not guaranteed	Non-guaranteed	Contractually promised or guaranteed	If a policy is surrendered
Rates may increase, decrease or remain unchanged depending on actuarial valuations	Also known as final additional bonus	Guaranteed given that applicable conditions are met	The bonus though payable may be adjusted as per surrender value rules

How Does a Bonus Affect the Maturity Benefit?

A simplified maturity benefit may consist of:

Basic sum assured + vested reversionary bonus + terminal bonus + guaranteed additions

Not every policy includes all these components.

For example:

Basic sum assured: NPR 10,00,000
Accumulated reversionary bonus: NPR 8,00,000
Guaranteed addition: NPR 1,00,000
Terminal bonus: NPR 50,000

The illustrative maturity amount would be:

NPR 10,00,000 + NPR 8,00,000 + NPR 1,00,000 + NPR 50,000= NPR 19,50,000

The actual amount depends on the policy contract, declared rates and the policy’s status at maturity.

Is a Higher Bonus Rate Always Better?

Not really. It should be evaluated with other factors such as:

Annual premium;
Basic sum assured;
Policy duration;
Death benefit;
Guaranteed maturity benefits;
Premium-payment term;
Surrender value;
Riders;
Exclusions; and
Claim conditions.

Remember that a policy with a higher bonus rate may also carry a higher premium or provide a different level of protection.

Questions to Ask Before Buying

Before choosing a bonus-earning life insurance policy, ask:

Is the policy participating/ with profits?
Which benefits are guaranteed?
On what amount is the bonus calculated?
What happens to bonuses if the policy lapses?
How are bonuses treated on surrender?
Is there a terminal bonus?
Does the policy include guaranteed additions?

Conclusion

A life insurance bonus can increase the amount payable under an eligible policy, but it must be understood correctly. The bonus is usually linked to the policy’s sum assured and the insurer’s surplus fund. Future bonus rates are generally not guaranteed, and a quoted bonus rate should not be treated as an interest rate or investment return.

Before purchasing a policy, compare the complete benefit structure rather than selecting a plan based only on its advertised bonus rate.

Now that you understand what a life insurance bonus means, in our next article we will learn how it is calculated.