Bonus Annuity Pros and Cons
Jason Stolz CLTC, CRPC
Bonus annuities are designed to attract new investors by adding an upfront percentage to your premium—typically between 5% and 30% at the time of contract issue. But while the initial credit looks appealing, the real question is whether it enhances your overall income or long-term growth. At Diversified Insurance Brokers, we help clients evaluate the true value of these offers by focusing on what ultimately matters—what the annuity pays, not just the bonus rate.
This guide explains how bonus annuities work, their benefits, drawbacks, and how they compare with standard fixed and fixed indexed annuities.
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How Bonus Annuities Work
A bonus annuity applies a percentage-based credit to your initial deposit or transferred funds. For example, a 10% bonus on a $100,000 investment gives you an immediate $110,000 starting value—either to the accumulation account, the income base, or both, depending on the product.
Bonuses are often used to offset surrender charges or lost interest when switching contracts. However, bonuses are not “free money.” They may come with longer surrender periods or lower participation rates on indexed crediting options. It’s essential to analyze whether the total return and guaranteed income justify the trade-off.
Pros of Bonus Annuities
- Immediate value boost: Bonuses increase your contract’s starting value, improving the apparent yield in the first year.
- Stronger income base: Income riders with bonus credits can enhance lifetime payout potential, especially when deferral periods are long.
- Helpful during rollovers: Offsets surrender penalties from prior annuities or CDs.
- Tax-deferred growth: Like other deferred annuities, gains grow without annual taxation.
- Guaranteed minimums: Even with bonuses, your principal and credited bonus are guaranteed by the issuing carrier’s contract terms.
Cons of Bonus Annuities
- Longer surrender schedules: Bonus contracts often require 10+ year terms for full liquidity.
- Lower crediting rates: The carrier may offset the bonus cost by reducing participation rates or caps.
- Income-only bonuses: Some bonuses apply only to income calculations—not to cash value.
- Not always better: A higher bonus doesn’t guarantee better total payouts—net income and roll-up rate matter more.
- Complex terms: Each carrier defines bonus crediting and vesting differently—fine print matters.
How to Evaluate a Bonus Offer
The key metric isn’t the size of the bonus—it’s what the annuity pays. A 10% bonus on an income rider with a 5% payout may be less valuable than a no-bonus contract offering a 6.5% payout. Focus on the effective lifetime income and total guarantees, not marketing numbers.
Our advisors at Diversified Insurance Brokers provide clear side-by-side comparisons showing bonus crediting, roll-up rates, payout percentages, and liquidity options for every carrier we represent.
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FAQs: Bonus Annuity Pros and Cons
What is a bonus annuity?
A bonus annuity gives an upfront percentage credit to your investment—typically 5% to 15%—which increases the contract’s starting value for income or accumulation.
Are bonuses added to cash value or income base?
It depends on the contract. Some bonuses apply only to the income base for payout calculations, while others are vested in the accumulation value over time.
Do bonus annuities have higher fees?
Not necessarily, but they may feature lower crediting rates or longer surrender schedules to offset the bonus cost.
What happens if I surrender early?
Bonuses may be subject to vesting schedules. Early surrender could forfeit part or all of the credited bonus.
How important is the bonus compared to payout rates?
The payout rate matters more than the bonus. A smaller bonus with higher lifetime income typically delivers better long-term value.
