Financial soundness of a company is determined by comparing all assets with all liabilities. In a
valuation of a life Insurance Company, the liabilities pertaining to life Insurance policies are
worked out. Other liabilities, like outstanding capital etc. are already determined clearly and
don’t have to be estimated or assessed every time. The policies liabilities as determined by the
valuation have to be compared with all the assets less what is earmarked for other liabilities,
which are known. The net figure of assets is equal to what appears as “life fund” on the liabilities
side and is the fund set aside for meeting the claim of policyholders. There is surplus if the actual
life fund exceeds the liabilities shown by the valuation, which means that the fund set aside for
policyholders is more than the need. If the fund is less there is deficit.
If a surplus is shown in a valuation, it has to be distributed amongst the policyholder. Any bonus
distribution system should be equitable to existing and new policyholders, simple to operate,
easy to understand and flexible. Following are the main systems of distribution of bonus:

1. Reversionary Bonus
Under this system, bonus is given as uniform percentage additions to the basic sum assured and
is payable with the sum assured. It is called Simple Reversionary Bonus. If the bonus is
calculated as a percentage of the basic sum assured plus any existing bonus previously declared
it is known as Compound Reversionary Bonus.


2. Interim Bonus
Generally the bonus vests on policies that are in force on the date of valuation. Policies resulting
into claims by death or maturity subsequent to the policy year containing the date of valuation
will not have any bonus that year.
Therefore, interim bonus may be declared to be paid along in such claims. This is with a view to

facilitate settlement of claims that may arise before the next valuation is completed and avoid
reopening of all these cases at a later date.

3.Terminal Bonus
This benefit is payable on policies which are in force for the full sum assured for a minimum
period of 15 years before resulting into claim by death or maturity. This bonus is in addition to
the reversionary or interim bonus, if any. Terminal Bonus is not payable for paid up policies,
surrendered, or discounted policies. The bonus is always paid on Sum Assured.

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