Reversionary bonus

What is a reversionary bonus?

A reversionary bonus is a bonus that a life insurer declares each year on its participating (par) policies and adds to the policy's benefits. The name comes from the way it is paid: the bonus is attached to the policy when declared and paid later, together with the sum assured, when the policy becomes a claim on death or maturity. Once a reversionary bonus has been declared and attached, it becomes a guaranteed part of the policy and cannot be taken away, although future bonus rates are never guaranteed.

The insurer usually states the bonus as a rate per ₹1,000 of sum assured, for example "₹45 per ₹1,000 sum assured", which on a ₹10 lakh policy means ₹45,000 added that year.

How reversionary bonuses work in India

Bonuses are the mechanism through which par policyholders receive their share of the surplus of the par fund, as described under participating policies. The process each year, as of October 2026:

1. The appointed actuary values the par fund's assets and liabilities under the IRDAI (Actuarial, Finance and Investment Functions of Insurers) Regulations, 2024.
2. The actuary recommends how much surplus to distribute. At least nine-tenths of the distributed par surplus goes to policyholders; shareholders can receive at most one-ninth of the policyholders' allocation and never more than 10% of the actuarial surplus.
3. The insurer declares bonus rates, which can differ by product, policy term and duration in force.
4. The bonus is added to each eligible in-force policy.

The IRDAI (Insurance Products) Regulations, 2024 require regular bonuses to be declared only once a year. An interim bonus is declared at the annual valuation and paid on policies that become claims before the next valuation, so a death claim in, say, November does not miss that year's share. The appointed actuary is responsible for recommending interim bonuses under section 112 of the Insurance Act.

Simple and compound bonuses

Example. On a ₹10 lakh par endowment, a simple bonus of ₹45 per ₹1,000 adds ₹45,000 each year. If the same rate held for 20 years, the attached bonuses would total ₹9 lakh. Under a compound bonus of 3%, the first year adds ₹30,000; the second year's 3% is applied to ₹10.3 lakh, adding ₹30,900, and so on. These figures are illustrations only: actual rates are declared each year and can rise or fall.

What happens to bonuses on surrender, lapse or claim

• Death or maturity. All attached bonuses are paid with the sum assured, along with any interim and terminal bonus.
• Surrender. The surrender value of attached bonuses is added to the guaranteed surrender value. The cash value of a bonus on surrender is less than its face value, because the bonus was meant to be paid years later.
• Paid-up. If premiums stop after the policy has acquired a surrender value, the policy continues as paid-up with the reduced sum assured and the bonuses already attached. Whether a paid-up policy earns any future bonuses depends on the product terms, so the policy document should be checked. See paid-up value.

Some products give the policyholder the choice of a cash bonus instead, paid out in the year of declaration, or allow bonuses to reduce future premiums. Each product's filing sets which options exist.

What reversionary bonuses mean for distribution

Bonuses are central to the par sale and to most disputes about it.

• Never project a past rate as a promise. Showing a customer "₹50 per thousand for 25 years" based on last year's declaration is a common way par plans are oversold. The benefit illustration at 4% and 8% gross returns, signed by both sides, is the only projection a seller should rely on.
• Explain "declared" versus "future". Customers often believe the whole projected maturity amount is guaranteed. The adviser should show which part is the guaranteed sum assured, which part is bonus already attached, and which part depends on future declarations.
• Bonus declarations as service moments. Annual bonus declarations, especially LIC's, are widely followed by agents and customers. Sending each customer their updated attached bonus, through the insurer's statement or the e-insurance account, reinforces the value of staying in force.
• Protect the customer at surrender. A customer with 12 years of attached bonuses who surrenders gives up the full face value of those bonuses and any terminal bonus. Before processing a surrender, a good adviser checks whether a policy loan or making the policy paid-up would serve the customer better.
• Claim time. Nominees often do not know bonuses form part of the claim. Explaining the claim breakdown, sum assured plus attached, interim and terminal bonuses, prevents complaints that the insurer "paid less".