A bonus annuity gives a premium bonus or a first-year interest rate bonus. Premium bonuses are linked with fixed index annuities, whereas interest rate bonuses are with traditional fixed annuities. Life insurance companies give the bonus as an inducement to buy that annuity. Annuity bonuses are credited on day one but vest during the contract’s life. Bonus annuities have less growth potential than non-bonus annuities. The following rundown on bonus annuities can be a great starting point. What’s an annuity bonus? Annuity bonuses provide the annuity owner more money at the beginning of the contract or afterward. That amount is more than what the premium would usually purchase. For example, if your bonus annuity has $100,000, the insurance company may add $5,000. Bonuses encourage policyholders to hold money in annuities longer. By adding a bonus, the issuer may be able to increase the overall payout. If your bonus is higher interest, the annuity provider will add it on top of the interest offered by the annuity. The incentive may be for one year or several. Sellers usually describe this extra interest as offsetting any surrender charge. Surrendering your current annuity for a bonus annuity What if you already have an annuity and want to switch? When considering a bonus annuity, consider the cost of surrendering an existing annuity, the bonus’ amount, fees, and vesting timeline. When to buy a bonus annuity? Bonus annuity might be a good idea if: 1. You’re surrendering an annuity still in its surrender period. The bonus could help you recoup surrender charge losses. 2. You need or want an upfront growth on your funds rather than a greater long-term interest rate. Of course, you’ll usually earn from the bonus, but probably it won’t vest immediately. The bonus may not fully vest until the bonus annuity’s surrender term ends. Remember that you should never buy an annuity for the bonus. Instead, engage with a financial adviser to look for an annuity that meets your needs. If an annuity in your company gives a bonus, you can take it. Bonuses should be an added perk, not the main reason to buy a product. You can utilize a bonus to offset the surrender charges if you find a far better annuity. You should only do this if the bonus covers the surrender charges and the new annuity is much better. Bonus annuity pros 1. Higher guaranteed growth Assuming you complete the bonus’ requirements and vest, you’ll see a guaranteed growth of your funds. However, you may lose out on the higher growth potential that a non-bonus annuity might offer. 2. Flexibility Bonus annuities allow contract holders better access to their money if required. A certain amount may be withdrawn annually without a surrender penalty. Another option of using a bonus is buying an annuity with an income rider and taking income in the first few years. Your new annuity bonus might boost the remaining payments. 3. Knowing that an annuity bonus is coming Knowing you’ll get a bonus if you keep your annuity can be helpful. When your surrender period is up, and the bonus is vested, it’ll increase the funds available to be transferred into another annuity or to begin receiving annuity benefits. Either way, your retirement savings will have increased. 4. Bonus can offset surrender fee What if you want to replace your annuity during its surrender period? The bonus can then be used to cover surrender fees. 5. Lowering out-of-pocket costs You may want to spend as little as possible when buying an annuity. The bonus can help accomplish the annuity’s limited goal more effectively. Bonus annuity cons 1. Upside Caps The main drawback of a bonus annuity is that it has little upside potential. To get the bonus, you’ll have to forgo some potential growth. For instance, a bonus annuity frequently includes a longer surrender period and a higher surrender charge. That’s especially true if the bonus annuity doesn’t vest immediately. 2. Fewer riders and benefits Sometimes, to pay for a bonus, an insurer might reduce other annuity benefits; usually, that’s a rider benefit, like an income rider. Again, you must understand all the features and expenses of your bonus annuity before deciding. 3. Longer surrender period Also, surrender periods, which start when you buy a new annuity, may be longer than those you’re used to. When leaving a short-term surrender period for a longer one, ensure the bonus is worth the extended lock-up. Almost all annuities lock up money, to a considerable extent, for some period. Bonus annuities usually have longer terms than others. Generally, to get a bonus, you must accept a 7-year surrender period or longer (but not always). 4. Longer vesting schedule If you leave before your bonus is fully vested, you’ll lose a big chunk of it. That might be tricky if you also must pay a surrender charge. Moreover, as mentioned above, you might not own your bonus until years after starting the annuity. Many bonuses don’t fully vest until the annuity contract matures. Finally, bonus annuity expenses are frequently higher, reducing the bonus’s gain even more. 5. Lower rates Bonus annuities have a lower growth rate before the bonus. In other words, the benefit isn’t as significant as it seems because you started lower than you would have without it. Find your net bonus gain, not simply the gross amount. Last thoughts on bonus annuities An annuity bonus can be viewed as a pre-payment of the whole contractually promised amount that you would otherwise get on your annuity. Life insurance firms are required by law to evaluate the profitability of whatever policy they sell to remain competitive. A bonus annuity doesn’t provide you additional money; instead, it gives what you already expect but in a different way. Remember these considerations as you consider bonus annuities and other annuities. Your financial professional may save you time by locating appropriate options, answering questions, and helping you make educated decisions.
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Bio:
Helping people plan a secure financial future > REDUCE YOUR TAXES > CUT YOUR INVESTMENT COSTS > PLAN YOUR RETIREMENT > MEDICARE SOLUTIONS MADE EASYWE HELP OUR CLIENTS CONSERVATIVELY MANAGE THEIR INVESMENTS AND MAXIMIZE THEIR RETIREMENT INCOME.FRANK URBAN is a well-known financial speaker and educator in Charleston, South Carolina, and is President and Founder of The URBAN Advisory Group LLC, A Registered Investment Advisor, URBAN Healthcare Solutions For Seniors and is a Federal Employee Benefits Specialist. His expertise is helping retirees and those soon to retire avoid common, costly financial mistakes. For over 30 years Frank has been advising retirees and pre-retirees, including past & present employees of the U.S. Government, Veterans and their families, and many past and current owners and employees of local businesses as well as those from out of the area who choose to relocate to Charleston.He is/has been a member of the National Ethics Bureau, an organization that promotes consumer confidence by providing a source to verify business ethics for financial and insurance advisors. Frank has lectured widely on financial topics, hosted a Safe Money and Retirement Radio Show on WTMA 1250AM and speaks regularly to investors in greater Charleston and the surrounding areas. He attended Northeastern University and served in the United States Marine Corps. Frank has 4 children, 9 grandchildren and 9 great-grandchildren and lives West of the Ashley with his wife Donna. Office: (843)556-7400 Email: [email protected] Cell: (843)729-8667
