What is the difference between reversionary bonus and terminal bonus in a participating insurance policy?


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In a participating insurance policy, the policyholder invests part of the premium into the insurance company’s participating fund. Accordingly, the participating fund may distribute bonuses to the policyholders. On the whole, there are two types of bonuses in a participating insurance policy.

1. Reversionary Bonus

The first type of bonus is the reversionary bonus. On the whole, the reversionary bonus is a discretionary bonus. In other words, the insurance may or may not give this bonus to us. In reality, this bonus depends on the experience of the participating fund.

Example of factors affecting the participating fund: Claim experience, market volatility

At the end of the year, the insurance company will declare and credit the reversionary bonus into our participating policy. Thereupon, the reversionary bonus forms part of the guaranteed return in our participating policy. Furthermore, any subsequent revision will not affect the credited reversionary bonus.

However, we will only receive part of the accumulated bonus if we surrender the participating policy before its maturity date.

2. Terminal Bonus

As the term “terminal” suggests, the terminal bonus may be payable upon the termination of the participating insurance policy. In like manner, the terminal bonus is a non-guaranteed discretionary bonus.

Example of a payout situation: Upon policy claim, policy reaches maturity, policyholder surrenders the policy

Conclusion

Most insurance companies in Singapore offers some form of participating insurance policies. When you have time, understand what affects its performance. This will ultimately determine the value that you receive at the end of the day.

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In any case, the insurance company will definitely payout all bonuses which have already been credited into the policy. This promise is regardless of the future performance of the participating fund.

For future bonuses, it will depend on the appointed actuary’s recommendation. On balance, the insurance company is motivated to provide a higher return to the policyholders. This is because of regulatory requirements. In detail, there is a 9:1 ratio on policyholders to shareholders distribution. In other words, for every $9 given to the policyholder, the shareholder will receive $1.

Share Your Thoughts 💭

1️⃣ Do you own a participating policy?

2️⃣ How well do you understand a participating fund?

3️⃣ Are the bonuses within your expectation?


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