Altogether, reversionary bonus and terminal bonus form the non-guaranteed component in a participating policy’s cash value. Given that these bonuses impacts your policy’s cash value, let’s find out how they add up.

Table of Contents:

1. What is Reversionary Bonus?
2. What is Terminal Bonus?
3. How to determine the Non-Guaranteed Bonus?
4. Summary

Part 1: What is Reversionary Bonus?

By and large, the reversionary bonus is a discretionary bonus. In other words, it is up to the insurance company’s discretion on whether to declare this bonus each year.

After the insurer has declared the reversionary bonus, you will see the updated figures in your policy. Thereupon, it forms part of the guaranteed benefits for your policy. Be that as it may, it will not be affected by any subsequent years’ revision.

Part 1.1: What happens when You surrender the policy?

On this occasion, you will receive the surrender value of the accumulated reversionary bonus. In truth, this is only a proportion of the accumulated reversionary bonus.

Part 1.2: What happens when the policy matures or a claim arises?

In either case, you will receive the reversionary bonus in full.

Part 1.3: Bonus Rate, Compounding Rate

Next, it is important to realise that you may not get the same rate of bonus for all the plans. Furthermore, the compounding rate may be different too. To illustrate, I have extracted this statement from an endowment plan’s product summary:

Firstly, the reversionary bonus is S$25 per S$1,000 Insured Amount. For this purpose, it is compounded at 2.5%. In detail, this is based on an illustrated investment rate of return of 4.75% per annum.

To demonstrate, let’s assume that the insured amount for your endowment plan is $100,000. In this case, you will receive S$25 x 100 = $2,500 in reversionary bonus.

Part 2: What is Terminal Bonus?

As the term “terminal” suggests, you will receive the terminal bonus when you terminate the participating policy. For example,

• The policy has reached its maturity;
• The policyholder surrenders the policy; or
• Upon a claim for the policy’s benefit.

In the same way, the terminal bonus is a non-guaranteed discretionary bonus. Summing up, terminal bonus is a percentage of the accumulated reversionary bonus. In effect, the longer the time period, the higher the percentage. What’s more, the rate may be different for each payout situation. Generally, the terminal bonus is available only in the later years of the policy period.

Part 3: How to determine the Non-Guaranteed Bonus?

Above all, the insurer’s appointed actuary will conduct an analysis to determine the amount of bonus to distribute. All in all, this will depend on the participating fund’s experience. Accordingly, the insurer may decide to either

• Maintain the bonus rate at the same scale as the previous year; or
• Revise the bonus rate (increase or decrease the scale as compared to the previous year)

Part 3.1: Will the Insurer declare a higher bonus?

Overall, there exists an incentive for the insurance company to provide a higher return to you. This is because of the regulatory requirements. In detail, there is a 9:1 ratio on policyholders to shareholders’ distribution. That is to say that for every $9 given to the policyholder, the shareholder will receive $1.

Part 3.2: Is the bonus sustainable?

Unquestionably, the appointed actuary needs to ensure the financial soundness of the participating fund. In reality, it must be able to support the non-guaranteed bonus in the long run.

On the whole, the insurers try to avoid huge fluctuations in the non-guaranteed bonus by applying ‘smoothing‘. In brief, the insurance company will keep some of the profit made during the good years. From time to time, it will use this surplus to make up for the shortfall in the poor performing years.

Part 4: Summary

In summary, different insurers may operate their participating fund differently. Consequently, this has a direct impact on your participating policy’s cash value. With this in mind, you need to choose a reputable insurer with strong financial standing. After all, they will determine the value that you receive at the end of the day.

Finally, the declared bonus in a particular year may be different from the figures shown in the policy illustration. Therefore, you should conduct a regular financial portfolio review to keep your goals in check.

Checklist:

1. Do you own a participating policy?
2. How well do you understand the bonus structure for your policy?
3. Are the bonuses rate within your expectation?

First Published: 11 September 2019
Last Updated: 24 June 2020