Bonus annuities usually offer a high first year interest rate and thereafter the rate goes down. Bonus annuities were intended for people to make back past losses or to help offset surrender charges that were incurred by surrendering a policy before the policy term ended. Some brokers/agents use the easy sell of a premium bonus to entice a client to buy an annuity from them.
Fixed Bonus Annuities
Some fixed annuities offer a 1-3% bonus on the first year and a rate thereafter. The “base rate is the interest rate that the company projects it will pay in the second year of the policy but the base rate is not guaranteed in most annuities.
A “renewal rate” or “portfolio renewal rate” are rates that are renewed on an annual basis. Some refer to them as “trust me rates.” You do not know what you rate is going to be and you have to trust the insurance company every year to declare a competitive interest rate.
The first year bonus is used as an inducement alexistogel to move large sums of money into these annuities.
Fixed Index Annuities
Some Fixed Index Annuities (FIA’s) offer a premium bonus on the initial premium or on additional premiums for the first 5 years. This is also used as an inducement to buy the annuity because people like free money.
I have seen bonuses range from 2-15%. I would like to discuss the downsides to the free money being offered.
- The bonus may be vested (if you surrender early, they take back part of the bonus)
- Two Tier Bonus (after the surrender term, you may be required to annuitize the contract in order to realize all of your bonus)
- Lower Min. Guarantee (bonus products offer a lower min. guarantee)
- Lower Caps (yearly declared caps will be lower)
- High surrender charges
- Contracts are typically 10-17 years
Pre-Paid Interest
The insurance companies are in the business of making money for the shareholders. I do not know of company who can afford to pay a client 10% or more in bonuses, pay the agent, marketing organization, and their people and still make a profit. You have to ask yourself why am I getting this free money. The insurance company will do all or a number of the tactics I mentioned above in order to recover their bonus outlay.
All bonus annuities are not bad. You need to make sure that the bonus being offered does not detract you from what your needs are. Some broker dealers are requiring their brokers to only promote bonus annuities if they fall within the 10 10 Rule.