Terminal Bonus

An additional amount of money added to payments made on the maturity of an insurance policy or on the death of an insured person due to profitable or surplus investments by the insurer.

Terminal Bonus in Detail

Terminal Bonus: A terminal bonus is an additional amount added to payments made on the maturity of an insurance policy or upon the death of the insured individual. This bonus is contingent upon the investments of the insurer generating profits or surplus. It serves as an incentive for policyholders, reflecting the performance of the insurer’s investment portfolio.

Key Features:

  • Discretionary Nature: Terminal bonuses are typically discretionary and are declared by the insurance company.
  • Percentage of Sum Assured: These bonuses usually take the form of a percentage of the sum assured in the insurance policy.
  • Profit-Based: The bonus depends on the performance and profits made by the insurance company’s investments.
  • Timing: Paid either at the policy’s maturity or upon the death of the insured.

Examples:

  1. Endowment Policy: John has an endowment policy with a sum assured of $100,000. Upon maturity, the insurance company declares a terminal bonus of 2% due to good investment returns, adding an additional $2,000 to John’s payout.
  2. Whole Life Policy: Sarah’s beneficiaries receive a whole life policy benefit of $200,000 after her death. The insurer, having achieved substantial investment profits, adds a terminal bonus of 5%, resulting in an extra $10,000 for her beneficiaries.

Frequently Asked Questions (FAQs)

1. What determines the amount of the terminal bonus? The amount is determined by the insurer’s investment performance and overall profitability. The better the insurer’s portfolio performs, the higher the potential bonus.

2. Is a terminal bonus guaranteed? No, terminal bonuses are discretionary and depend on the insurer’s financial performance. There is no obligation for the insurer to pay this bonus.

3. How is a terminal bonus different from a reversionary bonus? A reversionary bonus is typically declared annually and added to the policy’s sum assured progressively, while a terminal bonus is a one-time payment at the end of the policy term or upon death, reflecting cumulative performance.

4. Can a terminal bonus be predicted? It’s challenging to predict as it relies on future investment performance, which is inherently uncertain.

5. Do all insurers offer terminal bonuses? Not all insurers provide terminal bonuses; it varies by company and policy type. It’s essential to verify during the purchase of an insurance policy.

  • Sum Assured: The predefined amount that the insurer agrees to pay upon the occurrence of the insured event.
  • Reversionary Bonus: Annual bonuses declared by the insurer, which become guaranteed once added to the sum assured.
  • Endowment Policy: A life insurance contract designed to pay a lump sum after a specified term or on death.
  • Whole Life Policy: A type of life insurance that remains in force for the insured’s entire life and pays out upon death.
  • Investment Portfolio: A collection of assets held by an insurer for generating returns.

Online Resources

Suggested Books for Further Studies

  • Life Insurance: A Consumer’s Handbook by Joseph M. Belth
  • Investing in Life: Insurance in Antebellum America by Sharon Ann Murphy
  • The Essentials of Life Insurance by Dr. Mahesh Chandra Purohit

Accounting Basics: “Terminal Bonus” Fundamentals Quiz

### What is a terminal bonus in the context of life insurance? - [x] An additional payment due on maturity or death. - [ ] A penalty for late premium payments. - [ ] A bonus paid annually irrespective of performance. - [ ] An interest earned on insurance premiums. > **Explanation:** A terminal bonus is an additional amount paid by the insurer at the maturity of an insurance policy or upon the insured's death due to surplus investment returns. ### Are terminal bonuses guaranteed? - [ ] Yes, they are guaranteed by all policies. - [x] No, they are discretionary based on the insurer's performance. - [ ] They are paid monthly. - [ ] They depend on the policyholder's premium payments. > **Explanation:** Terminal bonuses are discretionary and depend on the insurer's financial performance. They are not guaranteed. ### What determines the amount of terminal bonus? - [ ] Policyholder's health. - [x] Insurer’s investment performance. - [ ] Number of claims filed annually. - [ ] Policyholder's credit score. > **Explanation:** The terminal bonus amount is determined by the insurer's investment performance and overall profitability. ### In which forms can terminal bonuses be paid? - [x] As a percentage of the sum assured. - [ ] As a fixed annual amount. - [ ] Only during policy inception. - [ ] As a direct reduction in premiums. > **Explanation:** Terminal bonuses are typically paid as a percentage of the sum assured. ### Can a terminal bonus be predicted in advance? - [ ] Yes, it is set at policy inception. - [ ] Yes, based on annual premiums paid. - [x] No, it depends on future investment performance. - [ ] No, it is a random amount decided by policyholders. > **Explanation:** Predicting a terminal bonus is difficult as it entirely depends on future investment performances which are uncertain. ### When is a terminal bonus primarily paid? - [ ] During policy inception. - [ ] Annually with premiums. - [ ] Upon each premium installment. - [x] At policy maturity or death of the insured. > **Explanation:** Terminal bonuses are primarily paid at the maturity of the policy or upon the death of the insured individual. ### What other bonus is closely related to terminal bonus? - [x] Reversionary bonus. - [ ] Policy dividend. - [ ] Loyalty bonus. - [ ] Cash back bonus. > **Explanation:** A reversionary bonus, which is an annual bonus added to the sum assured, is closely related to the terminal bonus. ### Compared to terminal bonuses, reversionary bonuses are typically: - [ ] Paid less frequently. - [x] Declared annually and accrue progressively. - [ ] Larger in amount. - [ ] Based on the policyholder’s credit score. > **Explanation:** Reversionary bonuses are typically declared annually and progressively increase the sum assured, unlike terminal bonuses which are paid once. ### Are terminal bonuses applicable to all types of life insurance policies? - [ ] Yes, they are applicable to all policies. - [ ] Only applicable to health insurance. - [ ] Only applicable to auto insurance. - [x] It varies by insurer and policy type. > **Explanation:** Terminal bonuses are not applicable to all types of policies. It varies by insurer and the specific terms of the insurance policy. ### Why do insurers offer terminal bonuses? - [ ] To penalize policyholders. - [x] As part of profit-sharing with policyholders. - [ ] To reduce premium costs. - [ ] To calculate the sum assured. > **Explanation:** Insurers offer terminal bonuses as part of profit-sharing with policyholders, reflecting the high performance of their investment portfolios.

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Tuesday, August 6, 2024

Accounting Terms Lexicon

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