Glossary: Terminal bonus
An additional bonus added to a with-profits policy when it comes to the end of the term specified at the outset and “matures”. The terminal bonus is paid as a percentage of the final payout and is at the discretion of the life company and are not guaranteed and the rate changes from year to year depending on the return from the with-profits fund. In some cases, the terminal bonus accounts for half the maturity value of the policy.
With-profits funds are administered by life assurance companies and access to them is through the life company’s products such as bonds, endowments and pensions. Your monthly contributions are pooled with other investors’ money and invested in a mixture of shares, bonds, property and cash. Each year, a “reversionary” bonus (a declared percentage) is added to your investment and a large part of the policy’s final value depends on these bonuses during the investment period. In years when the with-profits fund performs well, some of the return is held back and paid out in years when the fund does badly and this “smoothing” process makes with-profits investments unique. When the policy matures, the life company may pay a discretionary “terminal bonus”.