Under a life insurance policy, there are generally three sources of surplus: investment or interest surpluses, risk surpluses and cost surpluses.
These surpluses arise when the income from investments is higher, the risk experience better or the costs lower than assumed in calculating the premiums. If the sum total of the various surpluses is positive, a surplus can be allocated. This is reviewed on an annual basis.
What is important is that surpluses are not contractually guaranteed and there is no entitlement to a surplus. The surpluses allocated in past insurance years have been earned, however, and are paid out together with the insurance benefit at maturity.
In the case of pure term life insurance, no benefit is paid out at maturity. Usually, therefore, the surpluses are offset directly against the premiums. This makes the premiums cheaper.