Reversionary and Terminal Bonus

[jensen]

Hi

Are these two bonuses the same thing? I am guessing they are not; reversionary is paid out of surplus, and terminal is paid out of asset share? But to me both seems to be paid of out some gain.

 

[didster]

Yes they are both paid out of some gain. (This is what a bonus is, a share of the fortunes of the entity - if it does well you get something, if not you don't)

Reversionary bonuses are during the life of the policy. Eg every year a bonus may be granted. (Once granted it becomes guaranteed, ie it cannot be taken back) If you regularly grant reversionary bonuses, you can make customers happy - nice to get a statement saying your benefits have increased.

Terminal bonuses are paid at the end of the policy (eg at maturity or on death) This amount can more exactly account of the profit and loss of the policy (since timing of payments are known) and you don't run the risk of promising something and find it's too expensive (as can happen with reversionary bonuses).

 

[jensen]

Thanks didster.

So, terminal bonuses are not guaranteed? It'll only be paid if there's a profit at the end, and none if the policy is making losses?

 

[didster]

No terminal bonuses aren't really guaranteed, because you only decide to give them at the time you're giving them.

Up until each reversionary bonus is awarded, it isn't guaranteed either. Only once a promise is made, then it becomes locked in.