After two years of wrangling, Aviva, the insurer that owns Norwich Union, has finally agreed to pay out £1 billion in reattribution to with-profit policyholders in what the company calls a great deal.

But who exactly will receive what — and is the offer as fair as it sounds?

Q: Who is eligible for a payout?

A: Around one million policyholders will be eligible for a reattribution payout, averaging £1,000 per customer.

Only policyholders who invested in the GCNU Life or CULAC with-profits funds before November 21, 2006, and remain in the funds on the day of reattribution, which is expected to be spring 2009, are eligible for payouts. These are mainly customers with endowment policies, pension policies and with-profits bonds.

Policyholders in NULAP are ineligible.

You can check eligibility online at www.norwichunion.com/fundtransfer.

Q: How much will policyholders get?

A: Each payment will depend on the size of the policy and how long it has left to run. Around 700,000 people can expect to receive between £400 and £1,000 and a further 220,000 will receive between £1,000 and £3,500.

Policyholders who choose to take part could expect payments in summer 2009.

Q: What does reattribution mean?

A: Under reattribution, policyholders are able to choose whether to receive a cash payment in return for giving up their right to receive any possible future payouts from the funds’ inherited estates — or to stay as they are, with the possibility of receiving future special distributions from the fund, if any are made. Aviva says that “sizeable distributions are unlikely, especially in the next few years”.

"Inherited estate" is the term used to describe the surplus assets in a with-profits fund, which have built up over years. With-profits funds operate a technique known as smoothing, where some of the investment return is retained in good years and added to top up returns during periods of poor performance.

Inherited estates build up because companies hold back too much money, short-changing previous generations of policyholders.

Q: I may be eligible – what happens now?

A: You do not need to do anything now. Later this year, policyholders who are entitled to the payout will receive a letter from Aviva, telling them the value of their individual payout. In spring 2009, eligible policyholders will have to vote in favour of the reattribution to receive a payment.

Q: How does the voting work?

A: Policyholders will be sent an information pack, setting out the voting process and what they need to do to receive a payment. It will be a free vote and policyholders are under no obligation to vote in favour. There is no majority vote as each policyholder can make their decision on a policy-by-policy basis.

If they do not vote, they will be assumed to have voted no and will not receive the payment. Policyholders who choose to vote no will continue to share in any future special distributions, if any are made, while they remain a policyholder.

Q: If I am eligible, should I accept the payment?

A: Dominic Lindley at Which? says: “Policyholders will need to individually decide whether to accept the deal or to retain their interest in the inherited estate. You do not need to take any action now — Norwich Union will write to individual policyholders later this year with details of the deal.

“The policyholder advocate, Clare Spottiswoode, is currently preparing material which will be sent to policyholders to help you make your choice. You may also wish to talk to your independent financial adviser.

“For some policyholders it may be a difficult decision; for others it is more an ultimatum than a real choice. Policyholders need to weigh up the current offer against how much you may receive from future special bonuses. If your policy has matured, or is soon to mature, you are unlikely to receive anything unless you accept the deal. By contrast, if you think you will stay with Aviva for a long time, you have more chance of receiving future special bonuses."

For more information, go to www.which.co.uk/withprofits

Q: Where is this cash for policyholders coming from?

A: The cash payment to policyholders comes from shareholder funds. The inherited estate continues to be used to support the fund and is only released to shareholders when it is no longer required by the fund.

Q: Aren’t policyholders getting a special distribution payout as well?

A: Yes — this was announced by Aviva in February. About 1.1 million policyholders will share a bonus of £2.1 billion. The payout will be made in instalments over three years and will add 10 per cent to policy values.

The combination of the company’s offer and the special distribution means that 70 per cent of the value of the £3.3 billion inherited estate would be released to policyholders if all policyholders voted to accept the payout.

Q: So is this a fair deal?

A: Ms Spottiswoode says yes. “I am delighted that we have a deal that is in the interests of the great majority of policyholders. There is a substantial amount of cash on offer,” she said today. The City watchdog, the Financial Services Authority (FSA), has also carried out an initial review and concluded that the offer is fair and should be put to policyholders.

Although some campaigners wanted 90 per cent of the value of the inherited estate to be released to policyholders, 70 per cent is better than many recent similar deals.

Mr Lindley at Which? says: “The deal is certainly better than that made to AXA policyholders in 2000. They were offered just 31 per cent of AXA's £1.7 billion inherited estate.”

Aviva’s rival, Prudential, last month dropped plans to give its policyholders a share of the £8.7 billion in excess capital that has built up in its with-profits fund.

Mr Lindley adds: “However, Which? believes that policyholders would have been in line for a better deal if the FSA protected policyholder interests and stopped allowing the inherited estate to be used for purposes, such as paying shareholder tax bills, subsidising new business, covering the costs of compensation for mis-selling and propping up the staff pension scheme.”

To find out if you qualify for a payout, call the Aviva helpline on 0800 051 1300 and give them your policy number.

Times Recommends

• How to sell your home in a downturn
• How to boost your spending power
• Unemployment benefits explained