Why the Claim Event Comes First
A terminal-bonus rate does not, by itself, establish that a bonus is payable. The rules for a participating policy can treat a maturity claim differently from a death claim, a surrender, or another payment event. A rate may be stated for one event and not another; eligibility may depend on policy status or completed duration; and some events may expressly receive no terminal bonus. The correct order is therefore classify the event, test eligibility, identify the applicable base and rate, and only then calculate.
This tutorial treats all products and figures as hypothetical. The contract or declared scale in a problem supplies the eligibility rules. There is no universal rule that every claim receives a terminal bonus, or that the same rate applies to every event. The earlier material on calculating terminal bonuses and on rates by duration and benefit base provides the background for applying a rate once the event is eligible.
A Reliable Event-by-Event Test
Use the exact claim event named in the problem. A benefit payable at contractual maturity is a maturity claim; a benefit triggered by the insured's death is a death claim; and a policyholder's request to end cover for a surrender value is a surrender. A payment made under another provision, such as a specified accelerated or disability benefit, is an other claim unless the rules explicitly classify it differently.
The policy status and the event date must also match the wording of the rule. “In force” does not automatically mean “eligible”: an in-force policy may fail a minimum-duration condition, while a paid-up policy may or may not count as in force for a particular rule. Do not infer either treatment. Read it from the stated conditions.
Decide whether the payment is for maturity, death, surrender, or another event. Use the event that triggers the payment, not merely the benefit name.
Check policy status, event timing, duration, and any explicit exclusions. Interpret “at least 10 complete years” as requiring the tenth policy anniversary to have been reached.
Use the rate and terminal-bonus base specified for that event and duration. Do not substitute another event's rate or another benefit amount.
If all eligibility conditions are satisfied, multiply the applicable rate by the stated base. If any required condition fails, the terminal bonus is zero.
For a claim event \(e\), let \(I_e\) equal 1 if the stated eligibility conditions for that event are satisfied and 0 otherwise. Let \(r_e(t)\) be the applicable event-specific rate at duration \(t\), and let \(B_e\) be the corresponding benefit base. Then the event's terminal bonus \(T_e\) is
This expression does not say that every policy has a bonus. The indicator records the eligibility decision; when \(I_e=0\), the product is zero regardless of the size of the rate or base. A problem might also specify a fixed amount or a different calculation method. In that case, apply the stated method, while keeping the eligibility test separate.
Why the Eligibility Indicator Works
The formula follows directly from the meaning of an eligibility rule. If the rule is not satisfied, the contractual terminal-bonus amount for that event is zero. If it is satisfied, the rule permits the rate \(r_e(t)\) to be applied to its specified base \(B_e\). Thus the two cases are
Because \(I_e=0\) in the first case and \(I_e=1\) in the second, both cases are represented by \(T_e=I_e r_e(t)B_e\). This is useful when comparing several possible claim events: the rate calculation can be kept consistent, while the eligibility indicator changes according to each event's own rule.
Worked Example: One Policy, Three Possible Claim Events
A hypothetical policy has a terminal-bonus base of $64,000 at the claim date and has completed 20 policy years. The stated rules are: maturity claims after at least 15 completed years receive 15% of the base; death claims receive 10% if the policy is in force and has completed at least 10 years; surrender and all other claims receive no terminal bonus. The policy is in force. Find the terminal bonus for each of three alternative claim events: maturity, death, and surrender.
Method. Test each event against its own rule, then use only that event's rate. The three events are alternatives, not simultaneous payments.
Maturity. The policy has completed 20 years, so it has passed the 15-year threshold. The maturity event is eligible. Its rate is 15%, or 0.15, and its base is $64,000:
Death. The policy is in force and has completed more than 10 years, so the death event is eligible. The applicable rate is 10%, not the maturity rate:
Surrender. The rule expressly excludes surrender claims. Duration and the existence of rates for other claim events do not change that exclusion:
Check. Each positive amount uses the $64,000 base and its own stated rate; the excluded event has a zero bonus. A common error is to apply the maturity rate to every claim just because the policy passed the maturity-duration threshold. The event-specific rules instead give $9,600.00 at maturity, $6,400.00 at death, and $0.00 on surrender.
Duration, Status, and Event Classification
Duration conditions require attention to the date convention in the problem. If a rule requires 15 completed policy years, a claim one day before the fifteenth policy anniversary has not met that threshold. If the wording instead defines duration differently, follow that definition. Avoid rounding an elapsed duration up to the next policy year unless the rules expressly require it.
Status conditions are equally specific. A paid-up policy may remain in force, but that fact alone does not establish eligibility under every terminal-bonus rule. For example, a rule may expressly include paid-up policies for death claims while excluding surrender claims. Treating paid-up status as an automatic yes or no without reading the rule can reverse the answer.
Worked Example: Paid-Up Status and Different Claim Rules
A hypothetical participating policy has been paid-up since the end of policy year 8. At the end of year 12, its stated terminal-bonus base is $42,500. The rules say that a death claim receives 8% of this base if the policy has completed at least 10 years; for this rule, an in-force paid-up policy qualifies. Surrender claims and accelerated disability claims receive no terminal bonus. Calculate the terminal bonus for a death claim, a surrender, and an accelerated disability claim at that date.
Method. Apply the explicit paid-up treatment only where it is stated, then classify each claim event separately.
Death claim. The policy has completed 12 years, which meets the 10-year minimum. It is paid-up, but the rule explicitly says an in-force paid-up policy qualifies. Therefore the death claim is eligible:
Surrender claim. Surrender is expressly excluded, so its terminal bonus is zero. The policy's duration does not override the exclusion:
Accelerated disability claim. This is an other claim under the stated rules, and it is expressly excluded. Its terminal bonus is also zero:
Check. Only the death event receives a bonus, and $3,400.00 is 8% of $42,500. The trap is to either reject the paid-up death claim despite the explicit inclusion, or award a bonus to another event merely because the policy has passed the duration threshold.
Threshold Dates and Event-Specific Rates
A duration threshold can apply differently to different claim types. A maturity bonus may be payable only at contractual maturity, while death eligibility may begin after a minimum number of completed years and surrender eligibility may begin at another threshold. The rate can also differ by event. A calculation should therefore preserve the event, the date, the duration and the selected rate as distinct pieces of information.
Worked Example: Claims Around a Completed-Year Threshold
A hypothetical 20-year policy has a terminal-bonus base of $55,000 at the claim date. Its rules state: a death claim receives 12% if at least 15 policy years have been completed; a surrender claim receives 5% if at least 15 years have been completed; and a maturity claim receives 20% only at the contractual 20-year maturity. Consider four alternative events: death one day before the 15th anniversary, death on the 15th anniversary, surrender on the 15th anniversary, and maturity on the 20th anniversary.
Method. Determine completed duration on each event date, then test the event-specific condition before applying its rate.
Death one day before the 15th anniversary. Only 14 policy years have been completed. The death rule's 15-year condition fails, so:
Death on the 15th anniversary. Fifteen policy years have now been completed, so the death claim qualifies. The calculation is:
Surrender on the 15th anniversary. The surrender rule has the same minimum duration, and the threshold is met. Its rate is 5%, rather than the death rate:
Maturity on the 20th anniversary. This is the contractual maturity event and the specified maturity date. The applicable maturity rate is 20%:
Check. The results are $0.00, $6,600.00, $2,750.00 and $11,000.00, respectively. The one-day difference around year 15 changes death eligibility because the rule requires 15 completed years. A common incorrect calculation rounds the pre-anniversary duration up to 15 and awards $6,600.00; the correction is to count only completed policy years.
Common Mistakes to Avoid
- Using one event's rate for another event. A maturity rate is not a default rate for death or surrender. Select the rate only after classifying the claim.
- Assuming a duration threshold guarantees a bonus. A policy can meet the duration condition but still have an excluded claim event.
- Assuming every payment is a maturity, death, or surrender claim. An accelerated benefit or other payment must be classified under its own rule.
- Ignoring policy status wording. “In force” and “paid-up” are not interchangeable eligibility tests unless the problem says how paid-up policies are treated.
- Rounding duration upward. For a condition based on completed policy years, a claim before the anniversary has not yet completed that year.
- Using the wrong base. The stated terminal-bonus base can depend on the event. Do not substitute a sum assured or another benefit amount without an instruction to do so.
Check Your Understanding
For each hypothetical situation, apply only the stated terminal-bonus rules. Amounts are payable in dollars.
- A policy has completed 13 years and is at contractual maturity. The maturity rule pays 7.5% of a $48,000 base after at least 12 completed years. What is the terminal bonus? (Answer: $3,600.00)
- A death claim occurs 9 years and 11 months after issue. The death rule requires at least 10 completed years and otherwise pays 9% of a $50,000 base. What is the terminal bonus? (Answer: $0.00)
- A surrender occurs after 11 completed years. The surrender rule pays 4% of a $37,500 base after at least 8 completed years. What is the terminal bonus? (Answer: $1,500.00)
- An in-force policy has completed 18 years and has a $60,000 base. Its rules pay a maturity bonus at contractual maturity and a death bonus after 10 years, but expressly exclude accelerated disability claims. An accelerated disability payment is made before maturity. What is the terminal bonus for that payment? (Answer: $0.00)
- A policy became paid-up after year 7 and is in force at the end of year 12. The death rule explicitly includes in-force paid-up policies, requires at least 10 completed years, and pays 9% of a $62,000 base. What is the terminal bonus for a death claim? (Answer: $5,580.00)