The biggest bonanza yet as ScotAm sells out

Average bonus of pounds 1,400 could force up price of other insurers, says Steve Lodge

More than a million policyholders with Scottish Amicable are set to receive windfalls averaging pounds 1,400 as part of the life insurer's recommended takeover by the Prudential.

The headline windfall figure is higher than expected and is more than that from any other demutualising insurer so far, including Norwich Union. But the windfall is mainly in the form of bonuses on policies: there will be a cash handout worth an average of pounds 550 later this year, but to realise the full value of the windfall, policyholders must wait until their policy matures.

The high value of the deal, worth significantly more than previous proposals from ScotAm itself to float on the stock market rather than sell out, will put pressure on future bidders to "pay up" for the raft of remaining mutual life insurers considered ripe for takeover. These include Friends Provident, National Provident Institution (NPI), Scottish Provident and Scottish Life.

Only ScotAm "with-profits" policyholders qualify for the payouts - these include most endowments as well as many pension plans managed or administered by ScotAm. Policies applied for right up until last Monday will get something, but ScotAm is not yet saying what the minimum payout will be. The size of individual windfalls will depend on how long a policy has been in force, and its value and type.

Because the windfall structure is not yet clear - whether, for example, there will be a minimim payout per policy - it is not known whether people with two or more policies will do better than those with one policy worth the same total amount.

About 400,000 ScotAm customers who are not considered members because they do not hold "with-profits" policies will get nothing. PEPs, unit trusts and "unit-linked" savings plans, as well as basic life insurance policies (called term assurance), are non-qualifying. Customers of the Prudential also get nothing.

ScotAm "with-profits" policyholders are being offered reassurances for the future performance of their policies. The Pru will cap any increases in policy charges at inflation over the next 10 years. The takeover will also allow more flexibility in the investment of policyholders' money, which should mean higher investment returns.

The Scottish Amicable brand will be retained but some jobs in Scotland are likely to go, if not immediately.

Policyholders will be given the opportunity to vote on the offer in June, before which they will be sent details of how individual windfalls will be calculated. ScotAm has sent out a letter informing policyholders of the proposed deal. Assuming it goes through, the cash payout will be in the autumn with the bonus element of the windfall added both soon after and when individual policies mature.

Abbey National and the insurer Australian Mutual Provident also made formal offers for ScotAm but the Pru's offer, worth pounds 2.9bn, was chosen because it offered "the best immediate and prospective value for members". Abbey and AMP are likely to turn their attentions elsewhere, but windfall- hunters should be wary of taking out policies simply in the hope of a payout. Most of the insurance policies benefiting from these deals are long-term financial commitments that are likely to tie you in long after your insurer has been taken over. Policies can also be high-charging and many are poor investments - PEPs, for example, are generally better than endowments.

q ScotAm has a policy holder information line, 0345 888 555.