Variable benefits and conventional with profit policies

Question 1

Reversionary bonuses

Answer 1

Bonuses that are usually allocated annually, which is likely to tie in with the minimum required frequency valuation for each insurer. Added to the sum assured, bonuses become guaranteed benefits, which they need to be reserved for.

Question 2

Terminal bonus

Answer 2

Terminal bonuses are usually allocated as a percentage of the basic sum assured and the bonuses allocated prior to termination(the final sum assured). Allocated when a policy matures or becomes a claim as a result of the death of the life assured.

• Terminal bonuses are used by insurance companies to reward policyholders for their loyalty and to provide an additional return on their investment.
• The terminal bonus is determined based on the performance of the insurance company’s investments and the level of profits earned over the policy term.
• For the policyholder, they provide an additional source of income at the end of the policy term, which can help to boost their retirement savings or other benefits.
• For the insurance company, terminal bonuses help to attract and retain policyholders, as they provide an added incentive for policyholders to keep their policies in force.

Question 3

Simple reversionary bonuses

Answer 3

The rate of bonus each year is a percentage of the initial sum assured under the policy. The sum assured will increase lineally over the term of the policy.

Question 4

Compound reversionary bonus

Answer 4

The rate of bonus each year is a percentage of the basic sum assured and the bonuses added in the past. The sum assured increases exponentially over the term of the policy.

Question 5

Super compound reversionary bonuses

Answer 5

Two compound bonus rates are declared each year. The first rate (usually the lower) is applied to the basic sum assured. The second rate is applied to the bonuses added to the policy in the past. The sum assured increases exponentially over the term of the policy. The sum assured including bonuses increases more slowly than under a compound allocation in the earlier years, but faster in the later years.

Question 6

Benefits of super compound bonuses

Answer 6

• The sum assured and bonuses increases more slowly than under the other methods for the same ultimate benefit, enabling the office to retain surplus for longer.
• This method rewards longer standing policyholders and discourages surrenders relative to other methods.