Reversionary bonus
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Reversionary bonus –is a most commonplace bonus. This is the premium that the company expects each year, all through durance of the contract. Once approved the contract a firm is cannot withdraw from it. The reversionary bonus shall form part of the indebtedness of the company. The reversionary bonus is so called because policyholder gets him on the contract what becomes a claim by the end deal or adulthood. The bonuses can be paid on surrender [1].
Types of reversionary bonus
Is three types of reversionary bonus[2]:
- Simple reversionary bonus – the bonus worded as a percentage of the standard cash profit against the contract.
- Compound bonus – here the company expresses a bonus as a percent of essential benefit and already attached bonuses. It is, thus, a bonus on a bonus
- Super compound bonus – the bonus is practical are declared at conditions of two percentages. One employ to the essential gainings while the different, normally exalted applies to the dedicated attached bonus.
Last two types of bonuses have an advantage because the company can start with a smaller bonus and have bonus growth at a slower rate in the early stages. This makes way the company heave increase in free resources, what permitting on competitive investment policy or make new business. In the end, the contribution has a much higher step of bonuses. One of the crucial quality of the reversionary bonus systems is their accuracy. Rates bonus do not tend to differ over the apart years generally. This is in holding with policyholders expectations. As a life insurer estimates its steady bonus, must also guarantee that it can rational afford to pursue paying in the future[3]. The reversionary bonus has a smaller tends to fluctuate and he more effective real increase or decrease in the value of the elementary investments of the in the base year[4].
Another form of reversionary bonus is a terminal bonus, this bonus is connected to contract only when the contract end. That is a declared claim only for of the occurring year without about further years. The bonus depends on the time length of the contract and the gets enhanced as duration increases. The terminal bonus is a solution to the problem of how to treat large unrealized gains that were accrued through stepped-up investment in stock and immovables. In some insurance, companies may accept a cash bonus. Unlike for reversionary bonus is a cash bonus and reduction in premium in this cases, companies can accept a cash bonus system. In a cash bonus system company give out cash bonus when it advantages. This bonus can be a return as percent amount insured but can be also the reason on payable bonus. When the policyholder by receiving the bonus in getting without having a wait till the finish of the agreement period, the company had no profit[5].
Examples of Reversionary bonus
- Life Insurance- Reversionary bonus is a common feature of life insurance policies. It is a certain percentage of the sum assured that is paid to the policyholder on maturity. This bonus is declared by the insurer each year, and is added to the sum assured and payable on maturity.
- Unit Linked Insurance Plans (ULIPs)- Reversionary bonuses are also seen in Unit Linked Insurance Plans (ULIPs). In ULIPs, the policyholder is entitled to receive a certain percentage of the sum assured, which is declared by the insurer each year. This bonus is added to the sum assured and is payable on maturity.
- Endowment Policies- Reversionary bonuses are also seen in endowment policies, which are a form of life insurance. In endowment policies, the policyholder is entitled to receive a certain percentage of the sum assured, which is declared by the insurer each year. This bonus is added to the sum assured and is payable on maturity.
Advantages of Reversionary bonus
Reversionary bonus is a benefit that a policyholder can receive upon maturity of an insurance contract. It is an additional bonus paid on top of the regular returns from the policy. There are many advantages associated with reversionary bonus, including the following:
- It provides additional returns to policyholders without any additional investment.
- It can be used to increase the overall returns from the policy by adding to the sum assured.
- It helps to cover the inflationary costs, thereby ensuring that the policyholder gets the full benefit of the policy.
- It can be used to increase the amount of coverage provided by the policy.
- It can be used to pay for the premium payments of the policy.
- It can be used to provide additional cash flows to policyholders in the event of an emergency.
- It can be used to provide additional security to policyholders in the event of death of the policyholder.
Limitations of Reversionary bonus
Reversionary bonuses have certain limitations that need to be considered when investing in them. These limitations include:
- The bonus is not guaranteed and can be changed or reduced by the insurer at any time.
- The bonuses are not paid out in cash but are added to the policy's surrender value, which means the policyholder will not receive the bonus until the policy matures.
- The rate of bonus may be adjusted downward by the insurer in the event of a financial crisis or other economic downturn.
- The bonuses are not paid out until the policy matures, so if the policyholder needs access to the money earlier, they may not be able to do so.
- The bonuses are not taxed as income, but they can be taxed when the policyholder withdraws the money.
- The bonuses are not inflation-adjusted and may not keep up with the rate of inflation.
The following are other approaches related to Reversionary bonus:
- With-Profit Bonus: This bonus is calculated based on the profits generated by the company. It is paid over and above the sum assured and is usually guaranteed. The bonus can be paid as a lump sum or as an increase in the sum assured.
- Terminal Bonus: This bonus is paid out to the policyholder at the maturity of the policy. It is calculated based on the profits generated by the company and is generally higher than with-profit bonus.
- Loyalty Bonus: This bonus is paid out to the policyholder for maintaining the policy for a certain period of time. This bonus is paid out annually and can be a fixed amount or a percentage of the sum assured.
In summary, reversionary bonus is a type of bonus that is paid out every year and forms part of the debt owed to the company. Other approaches to bonuses include with-profit bonus, terminal bonus, and loyalty bonus.
References
- Arnold, G.(2004). The Financial Times Guide to Investing
- Ballotta,L. Haberman S. ,Wang N.(2006) Guarantees in With‐Profit and Unitized With‐Profit Life Insurance Contracts: Fair Valuation Problem in Presence of the Default Option
- Bacinello, A. R. Biffis, E Millossovich, P.(2010) Regression-based algorithms for life insurance contracts with surrender guarantees
- Kutty, S. K.(2008). Managing Life Insurance
- Shang, K. Sethi, R.(2016) Managing With-Profit Portfolio using a Stochastic Approach
- Whiteley, J.(2001). Managing Your Money in Retirement
Footnotes
Author: Karol Żywczak
