In the context of life insurance, particularly with-profit policies, terminal bonuses and reversionary bonuses are types of bonuses that policyholders may receive in addition to the guaranteed benefits of the policy. Here's a breakdown of each:
1. Reversionary Bonus:
Definition: A reversionary bonus is an additional amount added to the sum assured of a with-profit policy. It is declared annually by the insurance company and is based on the profits made by the insurer's with-profits fund.
Key Features:
Once declared, it becomes a guaranteed part of the policy's payout.
It accumulates over the policy's term, increasing the guaranteed benefit that will be paid out upon maturity or death.
It is typically a percentage of the sum assured or the sum assured plus previously declared bonuses.
2. Terminal Bonus:
Definition: A terminal bonus is a one-time bonus paid out at the end of the policy, either upon maturity or death. It is also known as a final or maturity bonus.
Key Features:
Unlike the reversionary bonus, it is not guaranteed throughout the policy term but is determined at the end based on the overall performance of the insurer's investment fund.
It reflects the insurer's performance over the entire term of the policy.
It can significantly enhance the total payout to the policyholder.
Comparison:
Timing: Reversionary bonuses are added periodically (usually annually), while terminal bonuses are only added at the end of the policy term.
Guarantee: Reversionary bonuses, once declared, are guaranteed and cannot be taken away. Terminal bonuses, however, are not guaranteed and depend on the fund's performance over time.
Purpose: The reversionary bonus provides a steady accumulation of benefits over the policy's life, while the terminal bonus rewards the policyholder based on long-term investment performance.