Introduction
A reversionary bonus is an integral part of with-profits life assurance policies, serving as a financial enhancement to the basic sum assured. Declared annually, it is added to the policy if the life-assurance company reports a surplus or profit from its investments. Once added, the bonus is guaranteed and cannot be withdrawn, provided the policy reaches maturity or the insured passes away.
Historical Context
Life assurance as a financial instrument has evolved over centuries. The concept of bonuses was introduced to offer policyholders a share in the insurer’s profits. The reversionary bonus has its roots in the mutual insurance model, where policyholders essentially own the company and share in its profits.
Types/Categories of Reversionary Bonuses
- Simple Reversionary Bonus: Added annually to the sum assured, this bonus grows linearly based on a fixed rate.
- Compound Reversionary Bonus: Applied not only to the sum assured but also to previously declared bonuses, allowing for exponential growth.
- Terminal Bonus: A one-time addition made at the end of the policy term or upon death, reflecting profits that were not previously distributed.
Key Events and Developments
- Early 19th Century: Introduction of mutual insurance companies offering profit-sharing models.
- Mid-20th Century: Increased regulation and transparency in declaring reversionary bonuses.
- Modern Era: Enhanced investment strategies leading to higher potential bonuses for policyholders.
Detailed Explanations
How It Works: Each year, the insurance company assesses its profits and decides how much to allocate as reversionary bonuses. These bonuses become part of the guaranteed payout to the policyholder or their beneficiaries.
Mathematical Models
The reversionary bonus can be mathematically represented as follows:
Simple Reversionary Bonus Formula
Where:
- \( B_s \) = Final sum with simple reversionary bonus
- \( SA \) = Sum assured
- \( R \) = Annual reversionary bonus rate
- \( t \) = Number of years
Compound Reversionary Bonus Formula
Where:
- \( B_c \) = Final sum with compound reversionary bonus
Charts and Diagrams
graph TD
A[Insurance Company Profits] --> B[Surplus Declared]
B --> C[Reversionary Bonus Declared]
C --> D[Simple Bonus Added to Sum Assured]
C --> E[Compound Bonus Added to Sum Assured + Previous Bonuses]
Importance and Applicability
Reversionary bonuses play a critical role in:
- Enhancing Payouts: Providing higher returns to policyholders.
- Financial Security: Guaranteeing an increased payout irrespective of market conditions at the time of claim.
- Long-Term Investment: Encouraging policyholders to maintain their policies until maturity or death.
Examples
- Example 1: A policy with a sum assured of $100,000 and an annual simple reversionary bonus rate of 2% over 10 years would result in a total of $120,000.
- Example 2: The same policy with a compound bonus rate of 2% would result in approximately $121,899.
Considerations
- Market Conditions: Bonuses depend on the financial performance of the insurance company’s investments.
- Policy Surrender: Cashing out before maturity may result in reduced bonuses.
Related Terms
- With-Profits Policy: A type of life assurance that includes profit-sharing through bonuses.
- Sum Assured: The guaranteed amount payable on policy maturity or the insured’s death.
- Terminal Bonus: A final bonus payable at policy maturity or the insured’s death, reflecting undivided profits.
Comparisons
- Reversionary Bonus vs. Terminal Bonus: Reversionary bonuses are declared annually and added to the policy sum, whereas terminal bonuses are a one-time addition at the policy’s end.
- Simple vs. Compound Reversionary Bonus: Simple bonuses grow linearly, while compound bonuses grow exponentially.
Interesting Facts
- Some policies may offer different bonus rates based on the company’s financial performance and investment returns.
- Policyholders may benefit significantly from compound reversionary bonuses over long durations.
Inspirational Stories
- John’s Legacy: John maintained his with-profits policy for over 30 years, and upon his passing, his family received a payout significantly enhanced by reversionary bonuses, providing them with financial stability.
Famous Quotes
- “The beauty of compounding interest is that it pays you more on what you previously earned.” — Albert Einstein
Proverbs and Clichés
- “Slow and steady wins the race.” This proverb reflects the steady growth provided by reversionary bonuses.
Expressions, Jargon, and Slang
- Reversionary Bonuses: Often referred to as “annual boosts” in the insurance industry.
FAQs
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Q: What is a reversionary bonus? A: It’s an additional sum added to a life assurance policy based on the insurer’s profits.
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Q: Can reversionary bonuses be withdrawn? A: No, once declared, they cannot be withdrawn if the policy runs to maturity or the death of the insured.
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Q: What happens if I cash in my policy early? A: The bonus amount is usually reduced, depending on the remaining term.
References
- “Life Insurance Principles and Practice,” XYZ Publishing.
- “Insurance and Risk Management,” ABC Publications.
Summary
Reversionary bonuses are an essential feature of with-profits life assurance policies, offering financial growth and security. By understanding their mechanics, historical context, and implications, policyholders can make informed decisions about their insurance investments, ensuring greater financial benefits in the long run.
By thoroughly covering the term “reversionary bonus,” this encyclopedia article aims to provide a comprehensive understanding, thereby empowering readers with knowledge and insight.
