For LIC policyholders, the LIC bonus amount is what enhances the value of their life insurance policies offered by the Life Insurance Corporation of India (2023). These bonuses, comprising of Simple Reversionary Bonus, Final Additional Bonus, etc. are calculated based on factors such as the sum assured and policy term. Understanding how LIC bonus work and then how to calculate LIC bonus amount and the bonus calculation methods is crucial for LIC policyholders seeking to maximize their returns from LIC policies.
Let’s delve into the details of LIC bonus calculation and then explore the concept of vested bonus in LIC in India (2023)?
You can check the latest set of bonus rate of LIC on various LIC policies on LIC’s own website here. Or you can check the latest LIC Bonus Rates for 2022-23 on this site as well.
LIC Bonus Calculation Formula (2023)
Generally, the calculation of the LIC Policy Bonus is very simple and straight forward. While there are few types of bonuses, these are and it is calculated on the “Sum Assured per Rs 1000”.
That is, the LIC bonus amount calculation formula is as follows –
LIC Bonus Amount = Policy Bonus Rate X Sum Assured/1000
So the bonus rates announced by LIC for your policy will always be applicable on a per thousand per year basis. So for example if you have a LIC policy of sum assured Rs 10 lakh and LIC declares a simple revisionary bonus of Rs 45 per thousand Rupees of Sum Assured on the policy, then the policy bonus is calculated as Rs 10,00,000 x 45/1000 = Rs 45,000 for the give year in which bonus is announced.
Types of Vested Bonus in LIC Policies
So what is the Bonus Guaranteed Addition in LIC policies? Bonus is the extra amount (and hence, the term bonus) to the basic sum assured of the policy. These vested bonuses continue to accrue annually during the policy term and are eventually, paid out to policyholder or nominees along with the final accumulated bonus amount as the maturity benefit.
In case of LIC, there are following 3 types of LIC bonuses –
- Simple Reversionary Bonus – LIC declares this Simple Revisionary Bonus every year and it is added to your LIC policy account. But you don’t get it immediately as it simply accrues each year, but is paid out at maturity only. And the bonus just accrues each year without adding to principal or sum assured and therefore, there is no compounding of bonus in this case. The Reversionary Bonus rate is calculated as a proportion of the Sum Assured of the policy and NOT the accumulated premiums paid over the years. Please note that even though LIC has been consistently paying Simple Revisionary Bonuses each year without fail, it is something which is not exactly guaranteed. In case for any reason if in any given year there are no valuation surpluses, then the LIC has the technical right to not declare bonuses. But that is not as easy as it sounds given the socio-political impact of such a decision.
- Guaranteed Additions – This bonus is part of many of LIC policies and as the name implies, is guaranteed. This bonus/addition is pre-decided and generally becomes available after completion of a few years of the policy. It is not dependent on valuation surpluses made (or not made) by LIC in any given year and are guaranteed to be paid.
- Final Maturity Bonus / Final Additional Bonus / Loyalty Addition – These are one-time bonus amounts (usually declared on per Rs 1000 of sum assured) declared and promised to be paid at maturity of the policy and end of its policy term. These are paid out of LIC’s surpluses after reversionary bonus payouts have been made from valuation surpluses.
And unlike the word ‘bonus’ which tends to make people feel that they are getting something free or extra, the bonuses declared by LIC are not freebies but come out of the valuation surpluses on their policyholders’ funds.
These bonuses are simple additions to your account and don’t compound due to the revisionary nature of the LIC bonuses.
Let’s now use an actual example to calculate and see how LIC bonuses work and how to calculate LIC bonus for your policy.
How to Calculate LIC Bonus of your Policy (2023)?
Let’s see how to calculate vested bonus in LIC policies?
Let’s say a 30-year old buy a LIC New Jeevan Anand policy for Rs 15 Lakh sum assured and for a 25-year tenure. I used the LIC Premium Calculator on one of the sales websites of LIC (link) and here is the annual premium illustration
To purchase this policy, one needs to pay approx. Rs 67,113 per year as annual premium for the next 25 years. For this, you will get a sum assured and Rs 15 lakh life insurance coverage.
Now let’s calculate the bonuses for this policy.
As I detailed in the post tilted how to calculate returns of LIC New Jeevan Anand policy, here is how much you can expect to get on maturity after 25 years.
Here is what the policyholder gets on maturity as a sum assured as well as the bonus amounts after 25 years:
- Sum Assured – Guaranteed Rs 15 Lakh in Sum Assured
- Simple Revisionary Bonus – To estimate the simple revisionary bonus component, I have taken LIC’s last years’ declared bonus and assumed that it will remain at least same more or less around the next 25 years. In reality, this component may be higher but most probably, it might go lower as well as things have changed after LIC IPO and shareholders interest also need to be looked at and not just policyholders. Easier said than done but that is how it is expected to play out. So looking at latest LIC Bonus Rates announced, we find that the bonus rate is Rs 46 per thousand of sum assured. So for a Rs 15 lakh policy, this comes to Rs 69,000 each year. This is calculated as = 46/1000 * Rs 15 lakh. If we assume that this is the average bonus that will be declared each year, then in 25 years, this will amount to Rs 17.25 lakh in Simple Revisionary Bonus (calculated as 25 years x Rs 69,000 per year)
- Final Additional Bonus or Final Maturity Bonus – Now this is a bit tricky. We need to guess what will happen 25 years down the line. So let’s try 3-4 different FAB figures to see how it impacts returns. Let’s say LIC decides to declare Final Additional Bonus of Rs 200 per 1000 of SA, OR Rs 400 per 1000 of SA, OR Rs 600 per 1000 of Sum assured. So in each case, the FAB will be Rs 3 lakh, Rs 6 lakh and Rs 9 lakh respectively.
So in this example, the total of all these 3 values, comes to Rs 15 lakh (Sum Assured) + Rs 17.25 lakh (Simple Revisionary Bonus) + Rs 3/6/9 lakh (Final Additional Bonus) = Rs 35-42 lakh depending on the final bonus declared in the year of policy maturity.
But remember that these bonuses will not be paid to you immediately. Remember LIC bonuses are calculated and accrue each year. But you only get the LIC bonus at the time of policy maturity or if there is a death claim on the policy. Not before that.
Note 1 – All LIC Policies may not offer all the above 3 bonus components. Each LIC policy has its own set of features and bonuses.
Note 2 – While LIC has been here for decades and has been paying bonuses each year, please remember that bonus declaration is not guaranteed. So rate of past bonuses should not be considered as a given and guaranteed and these may or may not repeat in future. More so as LIC is now a listed company after the mega LIC IPO. The agents won’t tell you that as they need to sell you policies and for that, they need to promise you everything. I hope you understand.
Can you Withdraw LIC Guaranteed Bonus before Maturity?
No, you cannot withdraw the accumulated bonus guaranteed addition of your LIC policies prematurely. These LIC bonuses are only paid out with the final sum assured on policy maturity or death.
However, in case of policy surrender, LIC will pay out the bonus amount that has accrued till the date of the policy surrender.
Related Reading – Should I surrender my LIC New Jeevan Anand?
Hopefully, you would have found this article on How to Calculate LIC Bonus Amount (2023) in India useful. I have tried to make it as simple to understand as I could and have used LIC examples to explain how LIC Bonus works in India (2023) and how to calculate vested bonus in LIC policies. If you have doubts about what to do then please get in touch with a SEBI registered Investment Advisor to help you plan your finances properly.
Disclaimer – The views expressed above should not be considered professional investment advice or advertisement or otherwise. The article is for general educational purposes only. The readers are requested to take into consideration all the risk factors including their financial condition, suitability to risk-return profile and the likes and take professional investment advice before taking any financial decisions or actions which may have financial implications now or in future.