Insurance
ABOUT BONUSES.--II.
ON July 16th I said a little about the sources of surplus out of which bonuses are paid. We will .. now consider some of the principal methods of bonus distribution. Perhaps the simplest plan is that which increases the sum assured by the original policy by a-percentage of the - sum assured each year, or each five yearS. Thus with a simple bonus at the rate of £2 per cent. per annum, the £100 policy assures £110 after five years, £120 after ten years, and so on throughout.
The compound reversionary bonus system calculates the bonus on the original sum assured to begin with, and thereafter on the sum assured plus existing bonuses. Thus if the compound bonus is 2 per cent. per annum, and is declared every five years, the sum assured is increased from £100 to £110 at the end of five years, to £121 at the end of ten, and to £177 at the end of thirty. A simple bonus at the rate of £2 per cent. would amount to £160 instead of £177 at the end of thirty years.
Some offices in these days give bonuses on the compound reversionary system which are added to the policy every year, and a £2 bonus compounded annually would amount in thirty years to £181 instead of to £177. There is a difference of about £40 on each £1,000 assured.
The longer policies continue in force, the greater is the difference between the results of the compound and simple bonus systems, if the bonus is at the same nominal rate per cent.
A chief source of surplus is the interest that is earned on the funds in excess of the interest assumed. It is not until a policy has been many years in force that the reserves become large, and consequently it is those policies that earn the largest amount of surplus from interest, and therefore it may be fairly argued that policies of long duration should receive larger bonuses than policies that have been taken out recently. Thus the tendency of the simple bonus system is to give bonuses that are too large at first, and too small later on, though this may to some extent be adjusted by charging suitable rates of premium.
It is generally considered that the compound rever- sionary bonus system does substantial justice to all classes of policy holders at the same time that it has the great convenience of enabling policy holders to know what their assurance will amount to in the future on the supposition that the present rate of bonus will continue.
Formerly, and to some extent still, offices paying bonuses on policies which became claims between one valuation and the next, gave this interim bonus at a lower rate than had been declared at the last valuation. The actuaries might argue that they could not foretell what the rate of bonus would be five years hence, and so decided to err, if at all, on the right side from the office point of view. This somewhat objectionable practice has to a great extent been discontinued, and those offices which have not yet given it up will probably do so in the near future.
These simple and compound bonuses are declared as additions to the sums assured, but if the policy holder wishes, he can draw in cash the value of the reversionary bonus, or he can apply the cash value to reduce the premiums by a comparatively large amount for the next five years, or by a relatively small amount for the remainder of the premium-paying period.
The cash value of a reversionary bonus increases with the age of the assured. Thus if there is a bonus which guarantees £100 at death, it may be worth £35 at age thirty, or £53 at age fifty, or £78 at age seventy-five. Thus the cash value of reversionary bonuses on the com- pound system is steadily becoming greater, partly because the reversionary bonuses themselves grow larger, al partly because the cash value of a given amount o reversionary addition increases with age.
WILLIA:41 SCHOOLING.
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