Norwich Union customers last month found out that they would receive a slice of a £2.3 billion bonus as part of their with-profits life insurance policy.

The insurer revealed that 1.1 million of its customers would receive £1,900 and share holders will get a share of £230 million. The bonuses will be paid in three blocks.

Mark Hodges, chief executive of Norwich Union Life, said: “This special bonus is a major boost to policy values. We continue to believe that well-run, open, with-profits funds deliver real value for long term investors.

“Over the course of the next few weeks we will be writing to qualifying policyholders to give them more detailed information.”

Which? Draw attention to the fact that the actual surplus amount is £5.5 billion and Norwich Union are releasing half to its customers. The surplus is called an 'inherited estate' and is the amount of money accumulated over a period of time from with-profits policies. The surplus is divided between the customers in the form of bonuses.

The actual amount received can depend on how the company has been performing. When there has been a good build up of funds bonuses may be retained and redistributed in years which have a lesser yield. This is called 'smoothing'. The disadvantage often associated with this technique is that the insurer might retain too much money and policyholders in the more affluent years may lose out.

Dominic Lindley, personal finance campaigner a Which?, said: “While this may seem like a generous gesture by Norwich Union, the fact remains that £2.3 billion isn't even half of the inherited estate.”

He added: “Now there's the question of the £3.2 billion remaining in the inherited estate. We call on Norwich Union to act with integrity and to not hold back money from policyholders to pay its shareholders' tax bill, subsidise new business or to pay mis-selling claims.”

The insurer are currently deciding how to distribute the remaining surplus.

Aviva, the company that owns Norwich Union insist that the payout is generous and well divided. Shareholders are receiving 10% of the bonus and policyholders 90% which is the standard ratio in these circumstances.

Mr Lindley said: “This is the money that Norwich Union has held back from policyholders over the years, so it is only right that this payment is made on a 90:10 basis.”

With-profits life insurance is classed as an investment-type of policy that has an element of risk associated with it. Endowment insurance of this kind involves the policyholder paying their premium into a pool that is invested by the insurer. Profits are returned as a bonus but do rely on the stock market which can be unpredictable.

Another kind of investment policy are 'unit-linked'. These are similar in that money is invested by the insurer and returned to the policyholder. In this type the customer can choose which companies it would like the insurer to invest in. A payout is received upon death of the insured and depends on the worth of the investments at this time.

Author's Bio: 

Linsey is an author of several articles pertaining to Life Insurance. She is known for her expertise on the subject and on other Business and Finance related articles.