When you invest in a participating life insurance policy from the Life Insurance Corporation of India (LIC), you are entitled to a share in the corporation's profits. These profits are distributed to policyholders in the form of bonuses.
Understanding how these bonuses work is crucial for estimating your total maturity amount. Let's break down the two main types of bonuses: the Simple Reversionary Bonus and the Final Additional Bonus (FAB).
1. Simple Reversionary Bonus (SRB)
The Simple Reversionary Bonus is declared annually by LIC and is added to your policy's guaranteed sum assured.
How is it calculated?
The SRB is typically declared as a specific amount per ₹1,000 of Sum Assured. For example, if the declared bonus rate is ₹45 per ₹1,000 Sum Assured, and your policy's Sum Assured is ₹10,00,000, the calculation would be:
(10,00,000 / 1000) * 45 = ₹45,000
So, an amount of ₹45,000 is added to your policy for that year.
Key Characteristics of SRB:
- Not Compounding: The word "simple" means that the bonus is calculated only on the base Sum Assured, not on the accumulated bonuses from previous years.
- Accrued but not Paid: The bonus is added to your policy account every year, but it is not paid out in cash immediately. You receive the total accumulated bonus only when the policy matures or in the event of a death claim.
- Guaranteed Once Declared: Once LIC declares a bonus for a specific year, it becomes a guaranteed addition to your policy. Even if LIC faces losses in subsequent years, previously declared bonuses cannot be reduced or taken away.
2. Final Additional Bonus (FAB)
The Final Additional Bonus is a one-time bonus paid to policyholders who have kept their policies active for a long duration, typically 15 years or more. It is a reward for loyalty.
How is it calculated?
Like the SRB, the FAB is also declared as an amount per ₹1,000 of Sum Assured. However, it is only paid once—at the time of maturity or death claim. The rate of FAB usually increases with the term of the policy.
Key Characteristics of FAB:
- Loyalty Reward: It is designed to encourage policyholders to hold their policies until maturity.
- Varies by Term: A policy that runs for 25 years will typically receive a much higher FAB rate than a policy that runs for 15 years.
- Subject to Profitability: Unlike the SRB, the FAB is highly dependent on LIC's overall profitability and performance over the policy term.
Calculating Total Maturity Value
The total maturity amount you receive from a participating LIC policy is generally the sum of:
Basic Sum Assured + Accumulated Simple Reversionary Bonuses + Final Additional Bonus (if any)
Example Calculation
Let's assume you have an LIC Jeevan Anand policy (Plan 915) with the following details:
- Sum Assured: ₹10,00,000
- Policy Term: 21 Years
- Assumed Average SRB: ₹45 per ₹1000 per year
- Assumed FAB at 21 years: ₹100 per ₹1000
Calculations:
- Total SRB over 21 years: (10,00,000 / 1000) * 45 * 21 = ₹9,45,000
- Final Additional Bonus: (10,00,000 / 1000) * 100 = ₹1,00,000
- Total Maturity Amount: 10,00,000 (Sum Assured) + 9,45,000 (Total SRB) + 1,00,000 (FAB) = ₹20,45,000
Why Bonus Rates Fluctuate
It's important to remember that bonus rates are not fixed. They depend on the returns LIC generates from its investments in government securities, corporate bonds, and equities. While LIC has a strong track record of consistently declaring bonuses, the actual rates can vary from year to year.
This is why our LIC Calculators use historical average bonus rates to provide realistic estimates for your future maturity values.
Conclusion
Understanding the difference between the Simple Reversionary Bonus and the Final Additional Bonus is key to setting realistic expectations for your LIC policy's maturity value. When comparing policies, always look at the historical bonus rates of the specific plan, as different plans attract different bonus rates.