What Annuity Is Offering a 35% Bonus?

Today’s topic is a question that comes up often.

What annuity is offering a 35% bonus?

You may hear about annuities offering a 35% bonus, 25% bonus, 20% bonus, 15% bonus, or even higher percentages. On the surface, that can sound appealing.

If someone puts $100,000 into an annuity and hears they will immediately receive a 35% bonus, it may sound like their account suddenly becomes $135,000.

However, understanding how annuity bonuses actually work is important before making any decisions.

Key Takeaways

Annuity bonuses are not free money from insurance companies
Bonuses are typically part of the overall contractual structure
Most bonuses are attached to Fixed Indexed Annuities with Income Riders
The bonus usually applies to the income rider value used to calculate future income
Annuities with bonuses do not always provide the highest contractual guarantees
The focus should always be on contractual guarantees rather than promotional features

Insurance Companies Do Not Give Money Away

Insurance companies do not simply give money away.

Annuity companies are businesses, and their products are structured to account for every part of the contract.

If a product advertises a bonus, that bonus is part of the overall contractual guarantees within the annuity.

There are always 100 pennies in a dollar. If something is added to the contract in one place, something else is adjusted somewhere else.

The bonus becomes part of the overall structure of the annuity.

Where Upfront Bonuses Usually Appear

Most large upfront bonuses are attached to Fixed Indexed Annuities.

These products are sometimes sold with Income Riders, which are used to calculate lifetime income that may begin at a future date.

In many cases, the bonus is attached to the income rider portion of the contract.

That bonus becomes part of the calculation used to determine future income payments.

The Difference Between the Index Side and the Income Rider

Many Fixed Indexed Annuities include two different components.

One side is the indexed side of the annuity. This side involves caps, spreads, and participation rates that determine how interest may be credited.

The other side is the Income Rider side.

The bonus is typically applied to the Income Rider side.

That value is used only to calculate future income. It cannot be transferred, withdrawn as cash, or used as a lump sum.

The indexed side represents the actual contract value, while the Income Rider value exists solely for income calculations.

Bonuses Do Not Always Produce the Best Income

One important fact is that annuities with bonuses do not always produce the highest contractual guarantees.

Sometimes products with bonuses produce the strongest income numbers.

Other times products without bonuses produce higher contractual income.

That is why the bonus itself should not be the deciding factor when evaluating an annuity.

The focus should always be on the contractual guarantees.

Why Bonuses Should Not Be the Focus

Buying an annuity because of the bonus alone can lead to poor decisions.

Focusing on the bonus is similar to buying a car based only on the stereo system instead of evaluating the entire vehicle.

The bonus is only one feature inside the annuity contract.

What matters most is the guaranteed outcome written into the policy.

Replacing an Annuity for a Bonus

Another situation sometimes presented is replacing an existing annuity with a new one because the new product offers a bonus.

If someone suggests moving from one annuity to another primarily because of a bonus, that should be evaluated very carefully.

A bonus alone does not justify replacing an existing annuity contract.

Comparing All Carriers

Annuities are commodity products offered by multiple insurance companies.

Each company structures its products differently, which means contractual guarantees can vary across carriers.

Because of this, quotes should be run across all carriers to determine which annuity actually provides the highest contractual guarantees.

Bottom Line

Annuities offering a 35% bonus can sound appealing, but the bonus itself should never be the main reason for purchasing an annuity.

Bonuses are part of the overall contract structure and are typically tied to income riders used to calculate future income.

The most important factor when evaluating annuities is the contractual guarantees written into the policy.

Understanding those guarantees and comparing products across carriers is the best way to determine which annuity fits a specific retirement objective.