Bonus Annuities

What is a Bonus Annuity?

Overview

Some annuities with surrender charges reward the investor by offering a bonus: the insurance company adds an average of 3% to 5% to each of your premium payments, which can make for an excellent head start. For example, if you invest $10,000 in a bonus annuity the insurance company will add $300 to $500. The trade-off is that with a bonus annuity the surrender period is usually longer (eight to nine years in most cases versus the typical seven-year surrender) and each subsequent bonus payment will have its own eight or nine year surrender period.

Most bonus annuities allow you to withdraw 10% to 15% of your premium payments per year without a penalty, and some allow you to take the greater of all earnings or 10% to 15% of premiums (although any withdrawal from an annuity may be subject to taxes and a 10% federal penalty if taken prior to 59½ years of age).

There are a few other things to be aware of when exploring bonus annuities. First, bonus annuities typically pay the broker a lower upfront commission — a broker or agent may not volunteer that bonus annuities are available to you, so ask! Second, be certain to compare the annual fees and track record of the fund compared with the company’s standard, non-bonus product — sometimes the life insurance company will raise their fees to pay for the bonus. If you have any questions, you can always call an licensed financial professional to make sure that you pick the best annuity to meet your needs.

Criteria for Evaluating Bonus Annuities

When evaluating the numerous bonus annuity products on the market, Annuity FYI looks for a) features of the annuity itself; and b) the company issuing the annuity.

Criteria we use in evaluating the annuity are:

1. The incremental increase in the MEA fee on the bonus plan over the insurance company’s standard plan. We like to see a scenario where it takes the insurance company 15 years+ to recapture the bonus through the incremental MEA fee (15 years is the average amount of time that investors holds variable annuities). For example, take a 5% bonus annuity that costs 0.25% more than the standard plan. 5% divided by 0.25% = 20, meaning it will take the insurance company 20 years to recapture the bonus through the incremental MEA fee.
2. Add-ons — if additional contributions receive the same bonus, and for how long, and if additional contributions have their own surrender period.
3. Competitive annuitization factors and actuarial tables during payout phase. This translates into a larger lifetime income stream if you annuitize, for up to two people (husband and wife).
4. M&E and Admin fees — we generally favor annuities with MEA fees of 1.15% or less.
5. Outstanding features and benefits, including but not limited to living income benefits and enhanced death and estate benefits.
6. Sub-accounts and asset allocation models with strong historical returns that we believe will have strong future performance.
7. Turn-key asset allocation models to meet investor profiles ranging from conservative to aggressive, with active rebalancing.
8. A large selection of fund sub-accounts and the ability to invest outside of a model.
9. Length of surrender period — we generally favor annuities with surrender periods of 6 years or less.
10. Plans with generous penalty-free withdrawal provisions that won’t violate the riders.

Criteria we use in evaluating the insurance company issuing the annuities and riders are:

1. High safety ratings of the issuing company (although with variable annuities your assets are held separately from the insurance company’s general accounts, the features and benefits are based on the claims-paying ability of the issuing company and its re-insurers).
2. Company management, customer service, and ease of account access