Bonus credits, which insurers designed to reward persistency, usually take the form of an extra crediting rate to policies in force for a specified period of years. Often the illustrations will show higher rates being credited to policies after the tenth year, even higher rates after the fifteenth year, and even higher rates after the twentieth year. These bonus credits usually are not guaranteed, so, potentially, insurers could use excessive illustrated bonus credits to enhance the illustrated performance relative to competitive policies that do not project bonus credits.
Insurers similarly use terminal dividends, which are paid at death or when a policyowner surrenders a policy to reward persistency. They are typically greater the longer the policy remains in force. Although many companies provide some form of guarantee with respect to bonus credits (although it generally is a relative guarantee that dividends or cash value credits will be relatively higher on policies that have been in force longer, not an absolute guarantee as to the actual dollar level of credits), they generally do not guarantee terminal dividends.
If bonus credits and terminal dividends are not guaranteed, one should ask insurers to illustrate results in three ways:
- with the projected bonus credits and terminal dividends;
- without these credits; and
- with an intermediate assumption such as at two-thirds the projected rates.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM