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🎁 '''Annual bonus''' is a feature of traditional [[Definition:With-profits policy | with-profits]] (also known as participating) [[Definition:Life insurance | life insurance]] policies under which the insurer periodically credits a share of the fund's surplus to the [[Definition:Policyholder | policyholder]]'s guaranteed benefits, typically once a year. In the context of insurance — as distinct from the general corporate compensation meaning of the phrase — an annual bonus represents a permanent, irrevocable addition to the policy's [[Definition:Sum assured | sum assured]], reflecting the policyholder's participation in the investment returns, [[Definition:Mortality | mortality]] experience, and expense performance of the [[Definition:With-profits fund | with-profits fund]]. This mechanism is most closely associated with the United Kingdom's life insurance tradition but has parallels in other markets, including the reversionary bonus systems found in parts of Asia, the Indian life insurance market, and certain European mutual structures.

📊 Each year, the insurer's [[Definition:Appointed actuary | appointed actuary]] or [[Definition:With-profits committee | with-profits committee]] assesses the fund's performance and recommends a bonus rate, which the board declares. Once added, a reversionary annual bonus becomes part of the policy's guaranteed value — it cannot be taken away even if the fund underperforms in subsequent years. The bonus rate is typically expressed as a percentage of the basic sum assured or, in some formulations, as a percentage of the sum assured plus previously accumulated bonuses (a compound structure). Insurers balance the desire to distribute surplus fairly to policyholders against the need to maintain adequate [[Definition:Reserves | reserves]] and [[Definition:Solvency | solvency]] margins, a tension that regulators in the UK (through the [[Definition:Prudential Regulation Authority (PRA) | PRA]]'s with-profits governance requirements) and in other jurisdictions monitor closely. A [[Definition:Terminal bonus | terminal bonus]], by contrast, is an additional non-guaranteed lump sum payable at maturity or death, giving the insurer greater flexibility to smooth returns over time.

💡 Understanding annual bonuses matters because they represent a core value proposition that distinguishes with-profits products from [[Definition:Unit-linked insurance | unit-linked]] or [[Definition:Universal life insurance | universal life]] alternatives. For policyholders, the irreversible nature of annual bonus additions provides downside protection and a form of smoothed participation in market gains. For insurers, the obligation to honor accumulated bonuses creates a long-tail [[Definition:Liability | liability]] that must be carefully managed through [[Definition:Asset-liability management (ALM) | asset-liability management]] and reserving discipline. As with-profits funds in the UK and elsewhere have gradually moved into run-off or been restructured through [[Definition:Part VII transfer | Part VII transfers]] and [[Definition:Scheme of arrangement | schemes of arrangement]], the mechanics of annual bonus declaration remain relevant to actuaries, regulators, and policyholders with legacy contracts — and the concept continues to inform product design in markets where participating life insurance retains a meaningful share.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:With-profits policy]]
* [[Definition:Terminal bonus]]
* [[Definition:Sum assured]]
* [[Definition:Participating policy]]
* [[Definition:With-profits fund]]
* [[Definition:Appointed actuary]]
{{Div col end}}

Definition:Annual bonus - Revision history

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