Terminal Reserve

What Does Terminal Reserve Mean?

A terminal reserve is the remaining reserve of a life insurance company at the end of a policy year. It consists of net premiums received and investment income and is allocated to cover death benefits, dividends, and other policy-related expenses. At the start of the next policy year, this terminal reserve transitions into the initial reserve.

Insuranceopedia Explains Terminal Reserve

Even after a policy year concludes, an insurer must maintain reserves to cover claims that arise as the new year begins. This ensures that the insurer cannot distribute all net profits to its owners at year-end. Without a terminal reserve, the company would lack the funds needed to meet incoming claims at the start of the new policy year, potentially leading to financial insolvency.