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🎯 '''Terminal bonus''' is a one-time, non-guaranteed addition to the payout of a [[Definition:With-profits policy | with-profits life insurance policy]], applied only when the policy matures, is surrendered, or results in a [[Definition:Death benefit | death claim]]. Unlike [[Definition:Reversionary bonus | reversionary bonuses]], which are declared periodically and, once added, typically cannot be removed, a terminal bonus reflects the insurer's assessment of the overall investment performance of the [[Definition:With-profits fund | with-profits fund]] at the specific moment the policy concludes. It serves as a mechanism for the [[Definition:Life insurer | life insurer]] to distribute a final share of accumulated surplus to the departing policyholder.

📈 The calculation hinges on the performance of the underlying asset pool that backs the with-profits fund, factoring in equity returns, bond yields, property valuations, and the smoothing reserves the insurer has built up over the policy's life. Because terminal bonuses are discretionary, the insurer's [[Definition:Actuary | actuaries]] and board have significant latitude in determining their size — or whether one is paid at all. In periods of strong market performance, terminal bonuses can constitute a substantial portion of the total payout, sometimes exceeding the accumulated reversionary bonuses. Conversely, during market downturns or when the fund's solvency position is under pressure, insurers may reduce or eliminate the terminal bonus entirely to protect the fund's stability and meet [[Definition:Solvency requirement | solvency requirements]].

🔍 For policyholders, the terminal bonus introduces an element of uncertainty into what is otherwise a relatively predictable savings vehicle. [[Definition:Financial adviser | Financial advisers]] and [[Definition:Insurance broker | brokers]] must communicate clearly that this component is not guaranteed, particularly when projecting future policy values. From the insurer's perspective, the terminal bonus is a valuable tool for managing intergenerational equity within the with-profits fund — ensuring that policyholders who exit during favorable conditions share in the gains without depleting reserves needed for those who remain. Regulatory bodies scrutinize how insurers exercise this discretion, with [[Definition:Treating customers fairly (TCF) | treating customers fairly]] principles requiring that bonus decisions be transparent and consistently applied.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:With-profits policy]]
* [[Definition:Reversionary bonus]]
* [[Definition:Death benefit]]
* [[Definition:Smoothing]]
* [[Definition:Surrender value]]
* [[Definition:Life insurance]]
{{Div col end}}

Definition:Terminal bonus - Revision history

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