Tell me about life insurance and bonuses ?
A company might pay £4% compounded annually plus £5% on the bonuses attaching. On our £3,000 policy this would mean that after Year 1 the sum assured would be around £3,126; after the second year it would be £3,263.60, and so on.
It does not stop here. Since the 1960s many life insurance companies have introduced yet another category, the terminal bonus, also sometimes called a capital bonus. This is usually paid as an addition to reversionary bonuses and is declared and payable only at maturity or death. Its original purpose was to allocate capital gains over the existence of the life insurance policy, and since market prices can change substantially, it was also held that terminal bonus rates would alter to take account of these movements. In practice, however, companies using terminal bonuses have split into two camps, those that do adjust them according to market experience (some of these, for example, raised their terminal bonus rates substantially in 1972 when the stock market was high and lowered them sharply in 1974 when it was low) and those that have chosen to maintain terminal bonus rates at a specified and unchanging level. Clearly in comparing policies with reference to future values it is necessary to. You need to know which attitude a life insurance company adopts.
Terminal bonuses may be declared in two ways. Some companies declare them as a percentage of the sum assured for each year or number of years a life insurance policy has been in force, for example, 1% of the sum assured for each policy year. Others declare them as a percentage of the total bonuses already allocated to the life insurance policy, for example, 20% of all bonuses attaching.
With all these different bonuses and variations, it is easy to get confused. But as far as the individual is concerned the main thing to realize is that the different systems are all aimed at the same thing, distributing the surplus achieved by the life insurance company according to the success (or otherwise) of its investment management.
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