What Does Terminal Reserve Mean?
A terminal reserve is the leftover reserve of a life insurance company at the end of the policy year. Comprising net premiums due and investment income, it is used to pay for death benefits, dividends, and other policy-related expenses. At the beginning of the subsequent policy year, it becomes the initial reserve.
Insuranceopedia Explains Terminal Reserve
Even after a policy year ends, an insurer must have reserves on hand to pay for claims that begin to accrue as the new year begins. This means that an insurer cannot simply put all the net profits at the end of the year into the pockets of the owners. If a terminal reserve is not kept, then the insurer would have no way to satisfy claims that start coming in at the beginning of the new policy year. This could cause the company to become financially insolvent.