Does an Annuity Bonus Make Sense for You?

You may have heard of an “annuity bonus” if you have ever looked at annuities before. Bonuses are just one annuity feature, but are they warranted? Are these annuity bonuses a good thing in general, or are they more of a good fit in certain situations?

In this article, we will go over the basics of an annuity bonus, what it involves, what situations in which you might consider one, and the pros and cons of an annuity bonus. In general, annuities that come with a bonus are called “bonus annuities.”

What Are Bonus Annuities?

Bonus annuities are annuities that pay you a bonus either upon the start of the annuity contract or over a certain timespan. In many annuity contracts, the bonus might vest over time for the entire contract period (also known as a maturity period). However, there are generally only three situations where a bonus annuity may be warranted.

Say that you are thinking about moving money from one annuity into a new one, but the old annuity still has its surrender charge schedule in effect. If the new annuity had a bonus, then the bonus from the new annuity can offset the penalty from leaving the old contract early.

Annuity bonuses are also good if you want upfront growth without having to wait for it. They can also be good if you want more interest earnings upfront, as with a fixed annuity. Just know that you might give up growth potential for the rest of the contract period in exchange for this upfront growth. In some cases, non-bonus annuities might earn more interest than their bonus variations.

Which Annuities Offer Bonuses?

Upfront bonuses are usually found in fixed index annuities. These annuities earn interest based on how an underlying benchmark index changes in value, but they also guarantee your principal. When that benchmark index goes up, the gain is based on a portion of that increase. When the index goes down, the principal and gains are locked in.

Several fixed index annuities offer these bonuses as an incentive for people to own them, but many of the higher-growth fixed index annuities don’t come with bonuses. When an annuity offers a bonus, it usually comes at the expense of lower rates, and therefore reduced growth potential, from then on.

Some variable annuities also offer bonuses, which are then invested into subaccount funds that are chosen by the annuity owner. In other variable annuities, the money is dollar-cost averaged into the subaccounts over time, with the initial money earning a relatively high interest rate in a fixed account.

Here is a good thing to keep in mind about annuity bonuses. First, annuities do offer some liquidity with free withdrawals, which let you take out up to 10% of an annuity’s contract value per year. But say that you decided to withdraw above that amount or even exit the contract early.

In that case, some or all of the bonus could be taken away in addition to any surrender charges. As mentioned before, many bonuses have a vesting schedule that must be met before the annuity owner can walk away with the money.

How is the Annuity Bonus Calculated?

In most cases, the annuity bonus is simply a percentage of the amount of initial premium that is placed into the contract. For example, say that a given fixed index annuity has a maturity period of 12 years. It may offer a bonus of 12%, which means that if you put $100,000 in the contract, you will get a bonus of $12,000 upfront.

However, you won’t be able to withdraw that bonus amount right away. This bonus may vest at the rate of 1% per year for the next 12 years, so that if you withdraw more than a certain amount three years from now, you will forfeit 9% of that bonus on the amount you withdraw.

What is a Typical Bonus Paid on an Annuity?

In general, upfront annuity bonuses tend to run anywhere from 3% to 12%. Most annuity bonuses tend to fall into the 5-10% range.

Bonuses that are included in the initial interest rate of fixed annuities may be one to two percent. This “teaser” rate usually only lasts for a year or two.

Is an Annuity Bonus Right for You?

If you fall into one of the three categories mentioned above, then yes, a bonus annuity may be what you are looking for. The bonuses that are paid start accruing interest right away, although it’s also a trade-off for a slower rate of growth over time.

Here are three questions that you can ask yourself if you are exploring a bonus annuity:

1. Do I want immediate growth?

Although the overall rate of growth will be slower, a bonus annuity can pay you now. This is the chief advantage of this type of annuity. But if your goal is overall growth, then a non-bonus annuity can usually pay you more interest in return for having to wait for it.

2. Will I pay a surrender charge on the annuity that I am moving into the bonus annuity?

If so, the upfront bonus can partially or totally offset the surrender charge. Ideally, it will pay the total surrender charge. Insurance companies also have their own rules for accepting transfers of annuity money into new bonus annuities. Be sure to speak with your financial professional about that.

3. Do I want a higher interest rate now?

If so, then a higher “teaser” rate on a fixed annuity may be what you are looking for. Since interest compounds on the interest, it can boost your overall contract value, especially if you might be using that annuity for income later on.

But the subsequent interest rate will be lower to make up for this in most cases. The insurance company may lower rates for that purpose.

The Bottom Line on Annuity Bonuses

Remember, if the answer to at least one of these three questions is not yes, then you probably will get more bang for your buck from an annuity that doesn’t pay a bonus. Also, never buy an annuity just for its bonus.

The rest of the terms and features of the contract must make sense for you as well. The annuity also needs to have a defined role and be a clear solution for a gap in your financial plan. Consult your financial advisor for more information on annuity bonuses and whether they are right for you.

Are you looking for a financial professional to help guide you through your retirement questions and what-ifs in general? If you are ready for personalized guidance, many independent and experienced financial professionals are available here at SafeMoney.com.

Visit our “Find a Financial Professional” section to connect with someone directly, where you can request a complimentary appointment to discuss your goals, needs, and situation. Should you want a personal referral, call us at 877.476.9723.