Definition
A Reversionary Bonus is a sum added to the amount payable upon the death or maturity of a with-profits policy for life assurance. This bonus is credited by the life assurance company if it has a surplus or has earned a profit on the investment of its life funds. Once a reversionary bonus has been declared, it cannot be withdrawn if the policy matures or in the case of the insured’s death. However, if the policy is terminated early, the bonus is typically reduced proportionate to the remaining term of the policy.
Examples
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John’s Life Insurance Policy: John has a with-profits life assurance policy. The life assurance company has declared a surplus one year and adds a reversionary bonus of $5,000 to John’s policy. If John holds the policy until maturity or until his death, this bonus amount will be paid out in addition to the policy value.
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Emma’s With-Profits Policy: Emma, holding a similar policy, decides to cash it in early. Her reversionary bonus was declared at $3,000, but because she cashed out her policy 5 years before maturity, the bonus is reduced to $1,500 based on the assessment by the insurer.
Frequently Asked Questions
How is a reversionary bonus determined?
A reversionary bonus is determined based on the profits or surplus of the life assurance company’s investments in life funds. The specific rate or amount is typically declared annually by the insurer’s board.
Can a reversionary bonus be taken back once declared?
No, once a reversionary bonus is declared, it cannot be taken back, provided the policy runs to maturity or until the insured’s death. If the policy is cashed in early, however, the bonus can be reduced.
What happens to the reversionary bonus if I cash my policy early?
If a policy is cashed early, the reversionary bonus is often reduced based on the number of remaining years to the policy’s maturity. This reduction aims to reflect the premature termination of the investment term.
Who qualifies for a reversionary bonus?
Policyholders of with-profits life assurance policies qualify for reversionary bonuses, provided the policy’s investment funds have performed well and yielded a surplus or profit.
Are reversionary bonuses guaranteed?
No, reversionary bonuses are not guaranteed as they depend on the life assurance company’s performance and the profitability of their investments.
- With-Profits Policy: A type of life insurance policy that participates in the insurer’s profits. Policyholders receive bonuses or dividends, which are added to the sum assured.
- Surplus: The excess of an insurance company’s assets over its liabilities, often leading to profit sharing with policyholders.
- Terminal Bonus: An additional bonus paid at the end of a with-profits policy, either on maturity or in the event of the insured’s death, reflecting final surplus and policy performance.
Online References
Suggested Books for Further Studies
- Life Insurance: A Consumer’s Handbook by Karen Couch & Nick Armstrong.
- Understanding Life Insurance and Rethinking Policyholder Participation by authors Marco Eling and Kosmas Kosmidis.
- Life Insurance in Asia: Sustaining Growth in the Next Decade by Stephan Binder & Joseph Luc Ngai.
Accounting Basics: “Reversionary Bonus” Fundamentals Quiz
### What is a reversionary bonus?
- [x] A sum added to the amount payable on the maturity or death of a with-profits life assurance policy.
- [ ] A monetary gift given annually to policyholders.
- [ ] A penalty fee for early termination of a life insurance policy.
- [ ] The initial premium paid for a life insurance policy.
> **Explanation:** A reversionary bonus is a sum added to the amount payable on the maturity or death of a with-profits life assurance policy, resulting from the insurer’s surplus or profits from investments.
### Which investment outcome affects the reversionary bonus?
- [ ] The policyholder's credit score.
- [x] The insurer's investment performance and surplus.
- [ ] Market stock indices.
- [ ] The policyholder's life expectancy.
> **Explanation:** The reversionary bonus is influenced by the insurer’s investment performance and available surplus.
### Can a reversionary bonus be withdrawn once declared?
- [ ] Yes, any time at the insurer’s discretion.
- [ ] Yes, but only within a 30-day period after declaration.
- [x] No, if the policy runs to maturity or until the death of the insured.
- [ ] No, only after the policy term ends.
> **Explanation:** Once declared, a reversionary bonus cannot be withdrawn, as long as the policy runs to maturity or the insured’s death.
### In case of an early policy termination, the reversionary bonus is:
- [ ] Increased to compensate for the premature end.
- [x] Reduced based on the remaining term.
- [ ] Completely forfeited.
- [ ] Converted into a lump sum.
> **Explanation:** The reversionary bonus is often reduced depending on the length of time remaining if the policy is cashed in early.
### Who typically decides the amount of a reversionary bonus?
- [ ] The policyholder.
- [ ] International financial regulators.
- [x] The insurer’s management or board.
- [ ] Government taxation departments.
> **Explanation:** The insurer’s management or board decides the amount of the reversionary bonus based on annual surplus or profits.
### What kind of life insurance policy is eligible for reversionary bonuses?
- [ ] Term life insurance.
- [ ] Universal life insurance.
- [x] With-profits policy.
- [ ] Variable life insurance.
> **Explanation:** With-profits policies are the specific type of life insurance policies that may receive reversionary bonuses.
### Which of the following is not true about reversionary bonuses?
- [x] They decrease the sum assured.
- [ ] They depend on the profitability of the insurer's funds.
- [ ] They become part of the guaranteed payout upon maturity.
- [ ] They can be reduced on policy termination before maturity.
> **Explanation:** Reversionary bonuses increase rather than decrease the sum assured of a life assurance policy.
### Why are reversionary bonuses declared?
- [ ] To penalize policyholders.
- [ ] To reduce company liabilities.
- [x] To distribute profits made by the assurance company.
- [ ] To comply with federal insurance regulations.
> **Explanation:** Reversionary bonuses are declared to distribute the profits made by the assurance company to the policyholders.
### When is the reversionary bonus typically paid out?
- [ ] Annually, regardless of policy events.
- [x] At policy maturity or upon the insured's death.
- [ ] Monthly, as part of regular income.
- [ ] Upon the investment’s anniversary.
> **Explanation:** Reversionary bonuses are typically paid out at the policy’s maturity or upon the insured’s death.
### If there is no surplus or profit in the investment funds, will there be a reversionary bonus declared?
- [x] No, if there are no profits or surplus, a reversionary bonus is not declared.
- [ ] Yes, it's guaranteed regardless of surplus.
- [ ] Yes, if the policyholder contributes extra premiums.
- [ ] Reversionary bonuses are independent of investment outcomes.
> **Explanation:** If there is no surplus or profit in the investment funds, no reversionary bonus will be declared.
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