The Catch
Most people like free stuff. I know I do! Think of the late night television commercials where the charismatic pitch man says, “Call within the next ten minutes and receive not one, but two of [insert whatever useless item you don’t really need].” Sound familiar? Maybe you’ve even attended a “free dinner” only to find out the financial representative was trying to get the audience to invest in the latest annuity.
What Is A Bonus Annuity?
A “bonus” annuity can be a fixed or variable annuity that offers you a bonus on premiums or purchase payments made to your annuity contract. Typically, the insurance company that offers the bonus annuity will add an additional 2% to 5% of the first year premiums invested in the annuity. In my experience, annuity salespeople often position a bonus annuity as a tool to make up for the surrender charges of a previously purchased annuity in order to get the investor to move from one annuity contract to another.
The Cost
If you’re considering a bonus annuity, you should carefully consider the cost and surrender charges associated with the bonus annuity compared to other options. The majority of bonus annuities come with an increased fee for the life of the contract. For example, when I was analyzing an annuity offering a 4% bonus for a client, I uncovered the bonus annuity was more expensive and had a longer surrender charge compared to other annuities offered by the same company. A similar non-bonus annuity had a 7-year surrender charge and a mortality & expense (M&E) fee of 1.25% and the bonus annuity contract had an 8-year surrender charge schedule with a mortality & expense fee of 1.50%. As such, not including any other fees the client may have incurred, like investment management fees, they would be paying an additional .25% in expenses for a longer period of time (8 years vs. 7 years). Coincidentally, the additional .25% in fees for eight years totaled the 4% bonus the client would be receiving.
There Is No Free Lunch
Think before you act. If you’re considering investing in an annuity, purchase the contract for what it will do and not what it might do. The bonus should not be looked at in a silo when deciding whether or not an annuity makes sense for you. Making any investment is an important decision and should be looked at thoroughly with an investment advisory representative. So, go for the free dinner, but understand it’s ONLY a free dinner!
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.
