Definition
A Reversionary Bonus is a sum added to the amount payable upon the death or maturity of a with-profits policy for life assurance. This bonus is credited by the life assurance company if it has a surplus or has earned a profit on the investment of its life funds. Once a reversionary bonus has been declared, it cannot be withdrawn if the policy matures or in the case of the insured’s death. However, if the policy is terminated early, the bonus is typically reduced proportionate to the remaining term of the policy.
Examples
John’s Life Insurance Policy: John has a with-profits life assurance policy. The life assurance company has declared a surplus one year and adds a reversionary bonus of $5,000 to John’s policy. If John holds the policy until maturity or until his death, this bonus amount will be paid out in addition to the policy value.
Emma’s With-Profits Policy: Emma, holding a similar policy, decides to cash it in early. Her reversionary bonus was declared at $3,000, but because she cashed out her policy 5 years before maturity, the bonus is reduced to $1,500 based on the assessment by the insurer.
Frequently Asked Questions
How is a reversionary bonus determined?
A reversionary bonus is determined based on the profits or surplus of the life assurance company’s investments in life funds. The specific rate or amount is typically declared annually by the insurer’s board.
Can a reversionary bonus be taken back once declared?
No, once a reversionary bonus is declared, it cannot be taken back, provided the policy runs to maturity or until the insured’s death. If the policy is cashed in early, however, the bonus can be reduced.
What happens to the reversionary bonus if I cash my policy early?
If a policy is cashed early, the reversionary bonus is often reduced based on the number of remaining years to the policy’s maturity. This reduction aims to reflect the premature termination of the investment term.
Who qualifies for a reversionary bonus?
Policyholders of with-profits life assurance policies qualify for reversionary bonuses, provided the policy’s investment funds have performed well and yielded a surplus or profit.
Are reversionary bonuses guaranteed?
No, reversionary bonuses are not guaranteed as they depend on the life assurance company’s performance and the profitability of their investments.
Related Terms
- With-Profits Policy: A type of life insurance policy that participates in the insurer’s profits. Policyholders receive bonuses or dividends, which are added to the sum assured.
- Surplus: The excess of an insurance company’s assets over its liabilities, often leading to profit sharing with policyholders.
- Terminal Bonus: An additional bonus paid at the end of a with-profits policy, either on maturity or in the event of the insured’s death, reflecting final surplus and policy performance.
Online References
Suggested Books for Further Studies
- Life Insurance: A Consumer’s Handbook by Karen Couch & Nick Armstrong.
- Understanding Life Insurance and Rethinking Policyholder Participation by authors Marco Eling and Kosmas Kosmidis.
- Life Insurance in Asia: Sustaining Growth in the Next Decade by Stephan Binder & Joseph Luc Ngai.
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