policyholder dividends and bonus

If you hold a participating life policy and the insurer has a good year — fewer deaths than expected, strong investment returns, lower expenses — you may receive a payment that gives back some of that good fortune. In North American practice this is usually called a dividend; in British with-profits practice it is called a bonus. Both are the channel through which a par policy shares surplus.

Each year the insurer measures actual experience against the conservative assumptions it priced with. The favorable difference across mortality, interest and expense forms the divisible surplus, and a portion is distributed. A dividend can typically be taken as cash, used to reduce next year's premium, left to accumulate at interest, or used to buy small chunks of extra paid-up insurance. A with-profits bonus is often added as a reversionary bonus that permanently increases the guaranteed benefit, plus possibly a terminal bonus paid only at death or maturity. For instance, a policy might declare a 2 percent reversionary bonus, lifting a 100,000 sum assured to 102,000 going forward.

Actuaries determine these amounts through a dividend or bonus scale, aiming to be fair across generations of policyholders and to smooth the ups and downs of markets rather than pass on every swing. The crucial honesty: these payments are a return of over-collected premium and surplus, not investment 'income' and not guaranteed. In hard times scales are cut; a once-illustrated bonus can shrink, and projecting decades of bonuses as if certain misleads buyers.