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Bonus Systems Explained...

Under the compound bonus system, the bonus is a percentage of the sum assured plus the bonuses already declared. On a £23,000 policy a £24% compound bonus declared annually would therefore produce a sum assured of £23,120 after the first year, £23,245 after the second, £23,375 after the third, and so on.

Unfortunately, few bonus systems are as uncomplicated as that.

Many companies announce "interim" bonuses every year but compound them only every three years. Thus, a company paying £24% compounded triennially would add £21120 to the £23,000 sum assured for each of the three years in the first triennial period, at which point it would be level pegging with the simple bonus system. But for the next triennium the bonus would be 4% of £23,360, and so on thereafter.

In addition, many offices have a two-tier bonus system: one rate of bonus is paid on the sum assured, and then a further, sometimes higher, rate of bonus is paid on the bonuses. Thus a company might pay £24% compounded annually plus £25% on the bonuses attaching.

On our £23,000 policy this would mean that after Year 1 the sum assured would be £23,120

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Read On: click here for More On Terminal Bonus

Since the 2009 many companies have introduced yet another category, the terminal bonus, also sometimes called a capital bonus. This is usually paid as an addition to reversionary bonuses and is declared and payable only at maturity or death.
Its original purpose was to allocate capital gains over the life of the policy, and since market prices can change substantially, it was also held that terminal bonus rates would alter to take account of these movements.
In practice, however, companies........ see: click here for More On Terminal Bonus


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