Terminal Bonus in Detail
Terminal Bonus: A terminal bonus is an additional amount added to payments made on the maturity of an insurance policy or upon the death of the insured individual. This bonus is contingent upon the investments of the insurer generating profits or surplus. It serves as an incentive for policyholders, reflecting the performance of the insurer’s investment portfolio.
Key Features:
- Discretionary Nature: Terminal bonuses are typically discretionary and are declared by the insurance company.
- Percentage of Sum Assured: These bonuses usually take the form of a percentage of the sum assured in the insurance policy.
- Profit-Based: The bonus depends on the performance and profits made by the insurance company’s investments.
- Timing: Paid either at the policy’s maturity or upon the death of the insured.
Examples:
- Endowment Policy: John has an endowment policy with a sum assured of $100,000. Upon maturity, the insurance company declares a terminal bonus of 2% due to good investment returns, adding an additional $2,000 to John’s payout.
- Whole Life Policy: Sarah’s beneficiaries receive a whole life policy benefit of $200,000 after her death. The insurer, having achieved substantial investment profits, adds a terminal bonus of 5%, resulting in an extra $10,000 for her beneficiaries.
Frequently Asked Questions (FAQs)
1. What determines the amount of the terminal bonus? The amount is determined by the insurer’s investment performance and overall profitability. The better the insurer’s portfolio performs, the higher the potential bonus.
2. Is a terminal bonus guaranteed? No, terminal bonuses are discretionary and depend on the insurer’s financial performance. There is no obligation for the insurer to pay this bonus.
3. How is a terminal bonus different from a reversionary bonus? A reversionary bonus is typically declared annually and added to the policy’s sum assured progressively, while a terminal bonus is a one-time payment at the end of the policy term or upon death, reflecting cumulative performance.
4. Can a terminal bonus be predicted? It’s challenging to predict as it relies on future investment performance, which is inherently uncertain.
5. Do all insurers offer terminal bonuses? Not all insurers provide terminal bonuses; it varies by company and policy type. It’s essential to verify during the purchase of an insurance policy.
Related Terms
- Sum Assured: The predefined amount that the insurer agrees to pay upon the occurrence of the insured event.
- Reversionary Bonus: Annual bonuses declared by the insurer, which become guaranteed once added to the sum assured.
- Endowment Policy: A life insurance contract designed to pay a lump sum after a specified term or on death.
- Whole Life Policy: A type of life insurance that remains in force for the insured’s entire life and pays out upon death.
- Investment Portfolio: A collection of assets held by an insurer for generating returns.
Online Resources
- Investopedia - Life Insurance Basics
- The Balance - Understanding Different Types of Life Insurance
- Insurance Information Institute - Life Insurance Overview
Suggested Books for Further Studies
- Life Insurance: A Consumer’s Handbook by Joseph M. Belth
- Investing in Life: Insurance in Antebellum America by Sharon Ann Murphy
- The Essentials of Life Insurance by Dr. Mahesh Chandra Purohit
Accounting Basics: “Terminal Bonus” Fundamentals Quiz
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