How to calc final bonus on endowment

At the end of each year, the LifeCo get all the dosh from the years investment activites (remember - this a "with-profits" policy), and chuck it in the air - the stuff that sticks to the ceilling is the "bonus" for the policyholders, and they keep the rest.

HTH, Alan

In message , Clifford Frisby writes

No, the FSA projections bear no relation to reality and least of all how the final bonus works. In fact FSA requirements insist that final bonuses are NOT included in projections.

I assume that you really want to know the bottom line maturity value, including final bonus, rather than the final bonus per se.

To that end, surely you should have been getting FSA-mandated communications projecting what value the policy would be expected to mature with under various rates of underlying fund investment growth between the date of the projection and maturity. Presumably these estimates must converge (with each other and with the actual maturity value) as the remaining term reduces, and so the most recent projections can be used with reasonable certainty, barring any sharp correction in the underlying fund value prior to maturity. They would have a hard time justifying a major discrepancy, wouldn't they?

I not in a position to say that the above is correct, but if it isn't then I'm probably about to be disabused of a few of my own assumptions!

John wrote:

Basically they pick a random number based on how much money they have in the pot.

On the one hand, I can't refute what you say. But on the other, I was under the impression that these regular projections (which came about in the midst of concerns about lower-than-anticipated maturity values) were supposed to cut through all the crap about bonuses in the with-profits design, and allow people to plan ahead on the basis of what the shortfalls were really likely to be. 'Transparency' being the new order.

Given that they all the bonuses must come from the same pot, I would have thought that it would be a bit difficult for them to consider a distinction between the two types when projecting the 'What your plan might be worth' as a function of investment growth.

I remain skeptical, but I'd happily advise any third party to believe you rather than me!

In a sense there is no need to be, because the implication is that there is hope where previously I had none, so if what you say is true, I'm happy to be corrected!

I think John has called it right, based on my own experience. I had an endowment mature in 2001. Right up to the final project (about 3-4 months before maturity) they were projecting a final value of around

Nice one. It's interesting to have that real-life counter-example. I was thinking of asking the OP whether his projections were converging on his contractually guaranteed payout (sum assured plus accrued regular bonuses), to back up John's claim, but you have usefully preempted me.

John, thanks for putting me right.

OP, Nice question. I refer you to the answers supplied by Jonathan Bryce and Alan Frame!

Scottish Amicable are currently paying 51% terminal bonus on both the sum assured and accumulated bonuses.

If you would like to load your policy details on our website

Derek Way

No, it means that for the purpose of the illustration the effect of the final bonus is spread over the years left to maturity. Put it another way, the rates of growth shown are annual rates. There is no increases allowed for terminal bonus because they are assumed to be within the statutory rates. e.g. two separate illustrations, one for a w/p fund and one a managed fund, with the same premiums and current value, charges etc., will be exactly the same

Does this not contradict what your assertion?

Well, if I understand you correctly, then I don't disagree.

But then that would seem to validate, in theory, what I suggested to the OP. He has a policy with an insignificant term left to maturity, so there is hardly any uncertainty to be applied to the projected maturity values he has been given, and they presumably don't differ much between the 4%/annum or the 8%/annum investment growth projections because there is zip time for the differences to compound. Furthermore, if his projection includes (implicitly or explicitly) the same caveat as mine, then the projection includes any final bonus.

Why would the difference between the projected maturity value and the current guaranteed cash sum not give a reasonable estimate of the final bonus?

No, they assume that annual growth rate is the statutory rate of 7% or whatever, including the terminal bonus.

If you are 1 year into a 25 year policy, that might be OK, as you get lower rates in years 1 to 24, and a large bonus at the end.

If you are in year 24, and about to get a 51% bonus, they still assume the growth in year 25 is 7%, when in reality it could be much higher than that.

I see I should have said earlier that the life office must ensure that the policy holder is not assuming that there will be a final bonus in addition to the projected value, hence the wording you posted earlier.

To answer your question in your latest post : Because the rates of growth assumed are laid down by the FSA, not the life office and so bear no relation to what will actually happen, e.g. the current value from which the projections are based on the current surrender value and may also include some 'accrued' final bonus which would be paid on surrender, BUT whilst the underlying fund and reversionary bonuses may increase in value between now and maturity the final bonus may be cut or even removed meaning the end value is actually less than the current surrender value..

Well the actual growth rate of the investment was a lot more than 8%. The annual bonuses and terminal bonus are whatever they decide to give you. They bear some relation to investment growth, but they declare less than total growth in good years and more than total growth in bad years to smooth out returns.

I think I have a certain difficulty with the concept of the 'growth rate' being inclusive of the terminal bonus (apples and walnuts), but no difficulty with the claim that a projected maturity value includes the terminal bonus, and by implication all bonuses, however the eventual apportionment may end up.

But never mind, I will try a different tack.

Well, I've read that several times and can't help feel that there is a conflation here between underlying investment growth rates one the one hand, and policy bonus rates on the other. I hope you don't think I'm being intentionally obtuse.

What about the following thought experiment?:

Suppose I take out a 10-year with profits endowment. The adviser supplies me with some illustrations at standardised annual growth rates, one of which is a maturity illustration of £40000, including something she calls a terminal bonus, assuming underlying investment growth of 8%/annum. (She also supplies some weird stuff which talks about 'sum assured', 'target amount', annual bonuses' and other stuff which I promptly throw into the bin.)

It just so happens that the underlying investment growth in year 1 turns out to be bang on 8%. I get a nice letter at the end of year 1 which includes a projection of £40000 at maturity *including* *terminal* *bonus* assuming underlying investment growth of 8%/annum over the remaining 9 years. (I also get some strange bonus notice which makes me glaze over and so it gets thrown straight in the bin.)

It just so happens that the underlying investment growth in year 2 turns out to be bang on 8%. I get a nice letter at the end of year 2 which includes a projection of £40000 at maturity *including* *terminal* *bonus* assuming underlying investment growth of 8%/annum over the remaining 8 years. (I also get some strange bonus notice which makes me glaze over and so it gets thrown straight in the bin.)

FOR X=3 to 9 It just so happens that the underlying investment growth in year X turns out to be bang on 8%. I get a nice letter at the end of year X which includes a projection of £40000 at maturity *including* *terminal* *bonus* assuming underlying investment growth of 8%/annum over the remaining (10-X) years. (I also get some strange bonus notice which makes me glaze over and so it gets thrown straight in the bin.) END FOR LOOP

It just so happens that the underlying investment growth in year 10 turns out to be bang on 8%. To my surprise, I receive a cheque for £50000. I query this with the insurance company. They tell me the extra £10000 was due to the addition of a terminal bonus.

I decide that I don't understand endowments, but the experience leaves me so elated that I immediately start a new one.

Did I go wrong somewhere above? If so, where? If not, does there not appear to be something contradictory about a whole series of illustrations which are stated to be inclusive of any terminal bonus, culminating in an actual payout in excess of the illustrations due to the addition of a terminal bonus?

Yes, by taking any notice at all of the fictional projections stipulated by the FSA.

With profits endowments don't work like that. Each year a reversionary bonus is declared, which is usually a percentage of the basic sum assured. There may also be a bonus applied to previous bonuses. Finally at the end there may be a terminal bonus.

None of this relates to a percentage growth of a mythical fund.

No, I am asserting that the underlying growth rate of the fund *was*, in this example, 8% each year. And, I'm asserting that the initial illustration proffered 40k (incl. T.B.) under an assumption of 8%/annum future underlying investment growth of 8%. It's the other things which are up for grabs. (And I'm not saying anything about the effective return on my premiums, and nothing can be said about them because I haven't said what the monthly premium was.)

You are free to say that the sudden appearance of the extra 10k at the end is absurd.

Or you could say that the successive annual illustrations would somehow incrementally grow from 40k to 50k.

I can't see any other possibilities.

All true and accepted, but not relevant to my argument.

In message , Clifford Frisby writes

It is an understandable misunderstanding.

Sounds right to me (apart form the endowment actually growing at 8% pa ! :-)

Not as far as I can see.

Yes. Thats the FSA for you.

In fact the actual growth rate has been higher than 8%, but the increase only occurred on the very last moment of the last day.

The growth rate used is applied across the whole period of the investment.

No. The payment of the final bonus is only decided at the maturity date. To give an earlier indication of its value would be misleading and the FSA rightly say it cant be added in. It doesnt like customers thinking that there will be a final bonus when there may not be. It is a bonus which may not occur and can not be included in any projections.