What Is a Bonus Annuity?

A bonus annuity is typically a Fixed Index Annuity that includes an upfront bonus as part of the contract.

The bonus might be 10%, 20%, 25%, or even higher.

That can sound like free money.

It is not.

The bonus is part of the overall economics of the annuity contract, and it should never be evaluated by itself.

Key Takeaways

• Bonus annuities are commonly Fixed Index Annuities.
• The bonus is not free money.
• Bonuses often apply to an income base or other benefit calculation.
• A larger bonus does not automatically mean a better annuity.
• The entire contractual guarantee should be compared across carriers.
• Never choose an annuity solely because of the advertised bonus.

How Does a Bonus Annuity Work?

A bonus annuity provides an additional amount credited according to the terms of the contract.

The important question is where that bonus goes.

In many cases, the bonus may be added to an income base used to calculate future lifetime income.

That is not necessarily the same thing as adding the bonus to your immediately accessible cash value.

You need to read the contract.

A Bonus Is Not Free Money

Insurance companies are not giving away money.

The bonus is built into the economics of the contract.

If a product offers a 25% bonus, that does not mean the insurance company suddenly created 25% more spendable money without any trade-off.

Other parts of the contract may be different.

That can include:

• surrender periods
• crediting terms
• rider costs
• income factors
• liquidity provisions

The entire contract needs to be evaluated.

Why Bonuses Are So Effective in Sales Pitches

A big number gets attention.

If two annuities are being compared and one advertises a 25% bonus while the other does not, the bonus product can appear more attractive immediately.

But that does not mean it provides the stronger contractual guarantee.

The relevant question is what the product actually accomplishes.

Don't Buy an Annuity for the Bonus

Choosing an annuity because of the bonus is like buying a car because you like the stereo.

The stereo may be great.

But it does not tell you whether the rest of the car is appropriate.

The same principle applies to an annuity.

The bonus is one feature.

The contract is what you own.

What Does the Bonus Apply To?

This is one of the most important questions to ask.

A bonus may apply to:

• the income base
• a benefit value
• the contract value
• another calculation defined by the policy

Those are not interchangeable.

If the bonus applies to an income base, it may increase the value used to calculate future lifetime income without increasing the amount you can surrender for cash.

That distinction matters.

Bonus Annuities and Income Riders

Many bonus annuities are Fixed Index Annuities with Income Riders.

If your objective is future lifetime income, the important number is the contractual income guarantee.

The annuity may have a bonus.

It may not.

That should not determine the winner.

Compare the actual guaranteed lifetime income available from each carrier.

A Bigger Bonus Does Not Mean Bigger Income

A product with a 30% bonus can still provide less guaranteed lifetime income than a product with a smaller bonus or no bonus.

That is why bonus percentages should not be compared in isolation.

If lifetime income is the goal, compare lifetime income.

That is the contractual result that matters.

Annuities Are Commodity Products

Insurance companies compete against one another.

There is no single bonus annuity that is automatically best.

The right comparison is based on your age, premium, state, income start date, and contractual objective.

That means quoting multiple carriers rather than choosing whichever product advertises the largest bonus.

The PILL Framework

Annuities generally solve four contractual objectives:

• Principal Protection
• Income for Life
• Legacy
• Long-Term Care

There is no separate category for bonuses.

The bonus only matters if it helps create the strongest contractual solution for one of those objectives.

Ask Two Questions First

Before looking at bonus percentages, ask:

What do you want the money to contractually do?

When do you want those contractual guarantees to start?

If your answer is lifetime income seven years from now, compare the guaranteed lifetime income available seven years from now.

Whether the winning contract has a bonus is secondary.

Look Beyond the Headline Number

If someone leads the presentation with the bonus, ask to see the rest of the contract.

Look at:

• surrender charges
• income guarantees
• rider fees
• liquidity
• beneficiary provisions
• indexed crediting terms
• how the bonus is calculated

A headline percentage does not tell you whether the contract is appropriate.

Where to Compare Annuity Guarantees

Use our annuity calculators to compare current contractual guarantees from multiple insurance companies.

For lifetime income, compare the actual guaranteed income amounts rather than sorting products by bonus percentage.

The Bottom Line

A bonus annuity is typically a Fixed Index Annuity that offers an upfront bonus as part of the contract.

The bonus is not free money, and it should not be the reason you purchase the annuity.

The only meaningful question is whether the entire contract provides the strongest contractual guarantee for the problem you are trying to solve.

If the best solution happens to include a bonus, fine.

If it does not, the bonus should not matter.

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