Aviva has slashed its new inherited estate payout offer to policyholders to an average of £600 from £1,000.
The insurer said 90 per cent of policyholders will receive a payout of between £200 and £1,150, while the remaining ten per cent will be entitled to a higher sum from the surplus of its with-profits fund.
The individual payments will depend on the value and maturity date of the member's policy, Aviva added.
But the last offer, made in July, was almost double this amount. Aviva was forced to reduce the payouts when the value of the fund fell sharply amid tumbling markets.
Aviva has been criticised for using extra income from its with-profit fund for misselling claims and to top up its staff pension plan, rather than re-distribute the profits to policyholders.
Policyholder advocate Clare Spottiswoode, who negotiated the payouts on behalf of policyholders, said she was pleased with the deal.
"This is good news for policyholders after the turmoil in the financial markets that affected the plan announced last year," she said.
"This offer is also good for the great majority of policyholders under the FSA's current rules."
But consumer champion Which? is unhappy with the way policyholders have been treated.
Chief executive Peter Vicary-Smith, said: "Policyholders will be disappointed by the cut in the payout. The FSA's continual failure to defend policyholders' interests has cost them a substantial amount of money.
"Which? believes the FSA effectively looked the other way while Aviva plundered the inherited estate to pay shareholder tax bills, subsidise new business, pay misselling compensation costs when the company broke the rules and prop up a deficit in the staff pension scheme."
The FSA needs to develop a regulatory framework guaranteeing all of the inherited estate is used in policyholders best interests instead, Which? said.