What Is a Bonus Annuity?

A bonus annuity is usually a fixed indexed annuity (FIA) that credits an additional percentage to your premium when you open the contract. For example, if you invest $200,000 and the contract includes a 10% premium bonus, your starting benefit base or account value could begin at $220,000—depending on the product design.

That bonus may apply to:

• The income benefit base used to calculate future guaranteed lifetime income
• The account value used for growth and, in some cases, surrender value
• The death benefit available to beneficiaries, depending on the contract

Understanding how an annuity income bonus works is critical. In some contracts, the bonus is “real money” that you can walk away with over time. In others, it primarily enhances the income base and is only realized through lifetime withdrawals.

When Does a Bonus Annuity Make the Most Sense?

Bonus annuities tend to be most effective in a few specific situations:

1. You’re Close to Retirement and Want Maximum Income

If you’re within about 3–10 years of retirement and want to lock in a high guaranteed lifetime income, a bonus annuity with an income rider can be powerful. The upfront bonus can immediately increase your income base, which may translate to stronger lifetime payouts when you turn on the rider.

Many clients combine a bonus annuity with a portion of their qualified savings, such as a 401(k) or IRA. When you’re rolling over a larger balance, that bonus can meaningfully increase the projected income stream—especially when compared to contracts without any upfront credit.

2. You Recently Experienced Market Losses

After a market downturn, some retirees want to “reset” part of their nest egg into safer vehicles. For these clients, a bonus annuity can help offset recent losses. For example, if your portfolio fell from $300,000 to $240,000, a bonus structure—combined with principal protection—might help you regain footing faster than staying fully in volatile markets.

This is where comparing bonus annuity options to traditional fixed products and retirement income annuities becomes important. A well-designed bonus annuity can form part of a broader “income floor” strategy.

3. You Plan to Keep the Contract for the Full Term

Bonus annuities usually come with longer surrender schedules. They’re rarely appropriate for short holding periods. If you expect to keep the annuity for the full term—and primarily want it for guaranteed income or long-term accumulation—a bonus can add value without compromising your plan.

However, if you’re likely to need large withdrawals or want maximum liquidity, review the free withdrawal rules and potential surrender charges carefully before deciding.

Trade-Offs to Watch With Bonus Annuities

Every bonus has a cost somewhere in the design. Common trade-offs include:

• Longer surrender periods: Many bonus annuities have 10+ year surrender schedules.
• More limited index options: Some contracts offer fewer or lower-crediting index choices to offset the bonus.
• Potentially higher rider fees: Income riders attached to bonus contracts may cost more than non-bonus designs.
• Bonus recapture provisions: In some annuities, all or part of the bonus may be recaptured if you surrender early.

Our job is to help you see the whole picture—bonus, caps, participation rates, rider charges, and long-term income. For many clients, we also review bonus annuity pros and cons in detail to decide whether the trade-offs are worth it.

How Bonus Annuities Compare to Non-Bonus FIAs

A non-bonus fixed indexed annuity may offer:

• Shorter surrender periods
• Higher cap rates or participation rates
• Lower or simpler rider fees

A bonus annuity may offer:

• A meaningful day-one boost to income base or account value
• Potentially more competitive lifetime income payouts at the same age
• Stronger perceived value for savers who recently experienced losses

Instead of assuming one is always better, we model both types for your age, premium, and income start date. In some cases, a non-bonus FIA with strong interest-crediting potential can outperform a bonus contract over time. In others, the bonus annuity wins—especially when the primary goal is guaranteed income, not cash-out value.

When a Bonus Annuity May NOT Be the Right Fit

Despite the appeal of upfront value, there are situations where a bonus annuity may not be ideal:

• Short time horizon: If you need full liquidity in a few years, long surrender periods can be too restrictive.
• Large required withdrawals: If you anticipate withdrawing more than the free-withdrawal amounts, surrender penalties or bonus recapture rules may reduce value.
• Conservative rate-focused investors: If your priority is a simple guaranteed rate, a traditional fixed annuity or MYGA from our Current Fixed Annuity Rates page may be a better fit.
• Tax strategy conflicts: If you’re coordinating with a complex distribution plan, we may recommend a combination of fixed annuities, FIAs, and non-annuity assets instead of a single bonus contract.

For some retirees, we blend a bonus annuity with other strategies—such as non-bonus FIAs or income-focused products listed in our best fixed indexed annuities for income guide.

Integrating Social Security and Bonus Annuities

A bonus annuity rarely exists in a vacuum. It’s typically part of a broader income plan that also includes Social Security, pensions, and portfolio withdrawals. Using a portion of assets in a bonus annuity can help create a guaranteed income floor, giving you more freedom with your remaining investments.

We often coordinate annuity strategies with Social Security timing, similar to the planning approach discussed in our guide on how Social Security and annuities work together. The goal is to make sure your lifetime income is stable, tax-aware, and resilient against market shocks.

How Diversified Insurance Brokers Evaluates Bonus Annuities

As an independent firm, we aren’t locked into one carrier or one type of annuity. We review bonus annuities from multiple companies and compare them to non-bonus FIAs, traditional fixed annuities, and other income-focused products. We look at:

• Bonus percentage and how it’s applied (income base vs. account value)
• Income rider fees and payout factors
• Index-crediting methods and renewal rate history
• Surrender schedules and free withdrawal provisions
• Carrier financial strength and claims-paying history

If a bonus annuity genuinely improves your retirement outcome, we’ll show you how and why. If another structure is stronger, we’ll recommend that instead. You get clear comparisons—not sales pressure.