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With all these different bonuses and variations, it is easy to get confused.

But as far as the individual is concerned the main thing to realise is that the different systems are all aimed at the same thing, distributing the surplus achieved by the life insurance company according to the success (or otherwise) of its investment management.

When quotations are obtained, it will often be found that two or more offices with different bonus systems will quote very similar estimates of the maturity value of a policy with a given annual rate of premium. And, so far as the buyer of life insurance is concerned, the relevant questions are how policies compare with each other and which is best for him.

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In the case of with profit (or participating) policies there is no alternative to the assistance of a professional adviser who is well versed in the market and can do the spadework for you.

A couple of general points can, however, be made.

The first is that, over a short term, life offices using a simple bonus will often produce better results (ie.

maturity values) than those using compound systems. The reason is that the simple rate of bonus is likely to be a good deal higher than the compound rate and it will take the latter some time to catch up.

Over the longer term, the compound rate will almost certainly produce better results.

Though companies have not lowered reversionary bonus rates in the last 25 years, the declaration of steadily increasing rates of bonus over this period has reflected the increase in interest rates and the

experience of a reduction in reversionary bonus rates could be repeated.

The actual rates of bonus are never guaranteed, since investment conditions cannot be predicted. Only when they have been declared do bonuses become the policyholder's inalienable right.

A further point to note is that the reversionary bonus is payable on death or at maturity.

Should you wish to surrender your policy before maturity, you will not get the value of the bonus as declared, but its value "discounted" to the present time, at whatever rate of interest (and in relation to whichever mortality table) the actuary is then using.

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In the conventional bonus systems we have been looking at, the sum assured plays the central role in surplus distribution, which is achieved by additions to the sum assured.
Since this sum is payable on maturity or earlier death, this does place certain investment constraints on the company, which must always keep a watchful eye on mortality statistics and expenses at the same time as managing its investments.
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