Is the bonus on my insurance policy guaranteed?

You bought a life insurance policy years ago. Each year a letter says a "bonus" has been added. Or the agent said the policy will pay "sum assured plus bonus". Now you want to know: is that bonus mine for sure, or can it change?

The short answer depends on the type of policy. This article explains the difference using IRDAI rules, so you know which lines in your papers to read. It recommends no product and does not say what to buy, keep or surrender.

First: does your policy even have a bonus?

Only one kind of policy pays a bonus. The rules call it a "par product", short for "product with participation in profits". It means policies "are entitled to share in surplus (profits) during the term of the policy as per section 49 of the Act" (Schedule I, para 1.8, IRDAI (Insurance Products) Regulations, 2024).

The opposite is a "non-par product", where policies "are not entitled for any share in surplus (profits) during the term of the policy" (Schedule I, para 1.7, IRDAI (Insurance Products) Regulations, 2024). A non-par policy has no bonus to declare.

So your first job is to find one word in your policy papers: participating or non-participating. The IRDAI master circular's model form for a product asks the insurer to state "Participating / Non-Participating", and says the basic product belongs to one category only: "either par or non-par but not both" (product features form, para 8.1, Master Circular on Life Insurance Products, 12 June 2024).

Two kinds of promise

• Guaranteed money. An amount fixed in the contract.
• Declared money. An amount that the insurer announces later, from the profits it has shared with policyholders.

For non-par savings policies the rule is clear. Under non-linked non-par individual savings products, "the benefit shall be guaranteed in terms of an absolute amount at the inception of policy" (Schedule I, para 2.C.b, IRDAI (Insurance Products) Regulations, 2024). The figure is known on day one.

For par policies the rule is different. The bonus is not fixed on day one. The regulations describe how it builds up, and that is the heart of the answer.

How a bonus is declared: regular, interim and terminal

The regulations set out the bonus rules for non-linked par products. The maturity benefits "shall closely reflect the asset share and the bonus accruals during the term shall be as follows" (Schedule I, para 2.C.a, IRDAI (Insurance Products) Regulations, 2024). "Asset share" is the policy's own share of the fund the insurer has built up. Three kinds of bonus follow.

Regular bonus. It "shall be declared only on an annual basis" (Schedule I, para 2.C.a(i), IRDAI (Insurance Products) Regulations, 2024). So the insurer declares it once a year. Each year's declaration is a fresh decision. Nothing in these paragraphs says next year's rate will match this year's.

Interim bonus. It "shall be declared at the annual valuation period, which shall become payable during the inter-valuation period" (Schedule I, para 2.C.a(ii), IRDAI (Insurance Products) Regulations, 2024). It is tied to the gap between annual valuations.

Terminal bonus. The regulations speak of "terminal bonus or other forms of bonus, if any", and say it "shall become payable on the specified events or at the end of the term of the policy" (Schedule I, para 2.C.a(iii), IRDAI (Insurance Products) Regulations, 2024). Note the words "if any". The rule does not promise that a terminal bonus will exist.

Reversionary bonus: the word you will hear

Your insurer may call the yearly bonus a "reversionary bonus". The regulations use that word when they deal with lapse. A policy that has acquired a surrender value "shall not lapse by reason of the non-payment of further premiums but shall be kept in-force to the extent of the paid-up sum assured and the subsisting reversionary bonuses including guaranteed addition, if any" (Schedule I, para 4(A)(a)(6), IRDAI (Insurance Products) Regulations, 2024).

Two points follow from that wording.

• A bonus that has been added and is "subsisting" stays with the policy even when the policy turns paid-up.
• "Guaranteed addition" is a separate item from bonus. The regulations list them side by side, with "if any". Your policy document tells you whether you have a guaranteed addition, a bonus, or both.

The master circular's specimen table for an endowment product shows the usual shape. On death the benefit is "Full Sum Assured + vested bonuses". At maturity it is also "Full Sum assured + vested bonuses" (para 8.2 of the product features form, Master Circular on Life Insurance Products, 12 June 2024). "Vested" means already added. The circular's form also asks the insurer to say how profits will be distributed, "whether simple/compound reversionary bonuses, cash bonuses, terminal bonuses, etc." (para 8.4, Master Circular on Life Insurance Products, 12 June 2024). So the way your bonus is worked out, simple or compound, is stated in the product filing and should appear in your policy documents.

What is guaranteed and what is not

Pulling these together, here is a reading of the texts.

The honest answer is therefore: a bonus that has already been declared and added is part of the policy's subsisting benefits. A future regular bonus, and any terminal bonus, is declared later. The regulations do not guarantee the rate.

One more part of the rules guards the policyholder from the other side. In savings products other than term insurance with return of premium, survival benefits including the maturity benefit "shall result in at least non-zero positive return to the policyholder" (Schedule I, para 2.C.c, IRDAI (Insurance Products) Regulations, 2024). That is a floor on the result of a savings product. It is not a promise about the size of a bonus.

Death, surrender and the bonus

On death, the master circular says: "For the participating products, in addition to the sum assured on death, the bonus and additional benefits as per terms and conditions stated in the policy shall become payable on death as part of the death benefit, if not paid earlier" (para 19, Master Circular on Life Insurance Products, 12 June 2024). The phrase "as per terms and conditions stated in the policy" sends you back to your own document.

On surrender, the rule says: "The surrender value of the any subsisting bonus and any accrued guaranteed additions shall be added to the guaranteed surrender value" (Schedule I, para 4(A)(a)(3), IRDAI (Insurance Products) Regulations, 2024). The regulations also set a separate special surrender value. For par policies it "shall represent the asset share", and the surrender value paid is "the higher of" the two measures (Schedule I, para 4(A)(a)(4) and (5), IRDAI (Insurance Products) Regulations, 2024). Note that the guaranteed surrender value is a formula figure; the special surrender value tracks the policy's asset share and so can move.

What your benefit illustration must show

At the time of sale the insurer must give you a customised illustration. "Every life insurer shall provide customized benefit illustrations to proposers or prospective policyholders at the point of sale for a product along with the prospectus" (para 3(a), Master Circular on Life Insurance Products, 12 June 2024). It is signed by both you and the person who sold the policy, and "shall form part of the policy document" (para 3(b), same circular).

For policies that are not wholly fixed at the outset, the illustration must separate the two kinds of money. "Except for products where all the benefits are assured in absolute amount at the outset of the contract, all other insurance products, in the customised benefit illustration, shall illustrate the guaranteed and non-guaranteed benefits at gross investment returns", currently stipulated as 4% a year and 8% a year for products other than annuity products (para 33.1, Master Circular on Life Insurance Products, 12 June 2024).

• The "guaranteed" column is the contract.
• The "non-guaranteed" column, which carries the bonus, is a projection at the two stipulated return rates. It is not a promise.
• The two rates are the stipulated illustration rates, not a forecast of what the insurer will pay.

Tax: is the bonus taxed when it is paid?

A sum received under a life insurance policy is dealt with in the Income-tax Act, 2025, Schedule II, item 2. It covers "Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy", and the exclusion from total income depends on the conditions in column C, which differ by the date the policy was issued (Schedule II, item 2, Income-tax Act, 2025). The mapping table for the 1961 Act places section 10(10D) of the Income-tax Act, 1961 against this item.

The conditions are not the same for every policy. For some policies, for example, the table sets a premium to sum assured ratio. Sums received under a keyman insurance policy are not eligible for exclusion (Schedule II, item 2(c), Income-tax Act, 2025). Whether a particular payout qualifies depends on the date of issue, the premiums and the sum assured of your own policy, and on whether the payout falls in a tax year governed by the 2025 Act or an earlier year under the 1961 Act. This article does not go through the full conditions, and the text of section 10(10D) of the 1961 Act was not opened for this article, so check it before you assume a payout is tax free.

Steps you can take with your own papers

• Find the word "participating" or "non-participating" on your policy schedule or product form.
• Find your benefit illustration. It is part of your policy document. Read the guaranteed column and the non-guaranteed column separately.
• Find the latest bonus statement. Look for whether the bonus is called reversionary, cash or terminal, and whether it is simple or compound.
• Ask the insurer in writing for the surrender value and the paid-up value, including the bonus component.

What to do now

• Next step: read your policy schedule and illustration and mark which amounts are guaranteed and which are declared (para 33.1, Master Circular on Life Insurance Products, 12 June 2024).
• Timing: the texts reviewed set no deadline for this. Do it before you decide to surrender or let a policy go paid-up.
• Consequence: subsisting bonus stays with a paid-up policy, but a future bonus rate is not fixed (Schedule I, paras 2.C.a and 4(A)(a)(6), IRDAI (Insurance Products) Regulations, 2024).

Have a CA review your facts before you act or file.

Frequently asked questions

Is the bonus on my policy guaranteed?
A bonus already declared and added is a subsisting part of a par policy. A bonus not yet declared is not fixed by the regulations. Regular bonus is declared annually, and terminal bonus is payable only "if any" (Schedule I, para 2.C.a, IRDAI (Insurance Products) Regulations, 2024).

What is the difference between reversionary and terminal bonus?
Reversionary bonus is the one added to the policy over the years and counted as subsisting (Schedule I, para 4(A)(a)(6)). Terminal bonus is the one that "shall become payable on the specified events or at the end of the term of the policy" (Schedule I, para 2.C.a(iii)).

Why does my illustration show two return rates?
The master circular requires guaranteed and non-guaranteed benefits to be illustrated at gross investment returns, currently 4% a year and 8% a year for products other than annuity products (para 33.1, Master Circular on Life Insurance Products, 12 June 2024).

Is the death benefit of a par policy only the sum assured?
No. The bonus and additional benefits as per the policy terms become payable on death as part of the death benefit, if not paid earlier (para 19, Master Circular on Life Insurance Products, 12 June 2024).

Is the bonus I receive taxable?
It depends on the conditions in Schedule II, item 2 of the Income-tax Act, 2025 (and section 10(10D) of the Income-tax Act, 1961 for earlier years). Those conditions turn on the policy's date of issue and premium details. Check them for your own policy.

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