There are certain factors which govern the degree of success a life company may achieve. They are:

  1. Mortality experience-how closely do actual deaths match expected deaths?
  2. Expenditure-how economically is the company run?
  3. Investment Return-how profitable are the investments made by the company?

A very successful company will have:

  1. Better than expected mortality experience-meaning claims will not have to be paid until later than expected.
  2. Low expenditure from an efficiently run organisation.
  3. High investment returns

It could have argued that a poor company would have the opposite results in these three areas.

It follows, therefore, that the successful company is able to build up a large fund which will be more than enough to pay claims as they arise. Every few years, or sometimes every year, a company will calculate the amount of money needed now to pay future claims and compare that with the funds they have available now. When the latter is greater than the former what is known as a 'surplus' arises and a large part of this can be returned either to policyholders in a mutual company and shareholders in a proprietary company.

Policyholders share in this surplus if they have contracted to take 'with profits' policies. In most cases these are 'endowment assurance' and 'whole life assurance' policies where the policyholders are paying higher premiums to give them the right to participate in the surplus distribution. A successful company will consistently have high amounts of surplus bringing additional benefits to its policyholders in the form of bonus additions to their policies.

These bonuses are usually in the form of 'reversionary bonuses', which means they will be paid with the guaranteed sum assured when a claim is made. Most companies nowadays declare a reversionary bonus each year and an addition is made to each policy; usually so much per cent of the sum assured on the policy. This is known as a 'simple bonus', in contrast to a 'compound bonus', where the bonus is allotted using the basis of the sum assured and existing bonuses combined.

In recent years companies found that good investment conditions were producing higher returns than they might expect and further additions are often now made when policies become claims. Again a percentage of the benefits under the policy is added when the claim is paid. This addition is called 'terminal bonus' but unlike the regular 'reversionary bonus' which tends to increase gradually over the years the 'terminal bonus' will reflect current investment conditions at the time it is declared.

Companies use their record of bonus additions as a sales point and there is keen competition to stay top-of-the-league in this respect.

Currently many of the mutual companies are giving up their mutual status. This has the effect of making the balance of surplus funds available to the with-profit policyholders rather than it being held in reserve.