Annuity Upfront Bonuses

Don't get lured in with the promise of
Don't get lured in with the promise of "free money". An annuity upfront bonus is not free money!. Photo by: Richard Goerg / Photographer's Choice RF / Getty Images

Understand the Genesis of the Upfront Bonus from a Carrier Standpoint

After the market chaos in 2008, many people were permanently spooked by unannounced market volatility and started looking for safety and principal protection. The annuity industry was eager to provide that guaranteed solution but mistakenly pushed confusing and complex products with too good to be true sounding benefits. One of these benefits has been over hyped and mis-sold by sales-driven agents to malinformed annuity buyers across the country.

 I’m sure there are good intentions on the carriers part, but that misunderstood benefit is the upfront bonus that many carriers offer to “attract” potential annuity buyers, and agents offer as some kind of free money. You need to filter this “sounds like free money” annuity benefit.

Figure Out How an Upfront Bonus Works

Upfront bonus offers are typically attached to variable and indexed annuity products. It’s not a random correlation that these two annuity types represent the vast majority of annuities purchased every year, with total sales over $200 billion annually. 

An upfront bonus works just like it sounds… with a “catch.” For example, if an annuity offers an 8% upfront bonus, and your initial premium is $100,000, then your account will show $108,000.  Sounds like a no-brainer. Sign me up, right? The "catch" is, there’s no free lunch, so there are some details that you need to clarify.

The first detail to understand is that most bonuses have annual fees, or they must be vested…or both. Vested means that you have to keep the annuity for the life of the policy in order to be credited the bonus in full.

Another detail to understand is whether the bonus applies to the accumulation value or the income value…or both.

So it is necessary to understand the difference. Always remember, that when it sounds too good to be true, it always is with annuities. Bonuses can work if fully understood, but should never be considered free money. 

When You Are Given Something, You Have Something Taken Away

Annuity companies have the big buildings for two primary reasons. The first is that they know when we are going to die, and secondly, they don’t give anything away for free. This common sense thought process applies to upfront bonuses as well. We are all smart enough to know that there are only 100 pennies in a dollar, so if an annuity company is “generous" and offers an upfront bonus, your radar should be going off. Find out what in the policy being taken away in exchange.

In many quotes that I run for the highest contractual guarantees, the products with NO bonuses frequently beat the products that have bonuses. I always say, "Buy the steak not the sizzle!". The upfront bonus sales pitch is nothing but sizzle.

The Upfront Bonus Is Only One Leg of the Income Stool Calculation

Upfront bonuses can work in some annuity situations, but only as one part of a contractually guaranteed calculation. For example, if you are planning for income in the future and decide to use an income rider (i.e. attached benefit) on an annuity with a bonus, there are many parts to consider when determining the contractual payout.

 In addition to the upfront bonus, the other items in the calculation would be the premium amount, the income rider percentage, how long you plan on deferring, and the actuarial payout when you decide to turn the income on. The bonus is just one of many parts, and does not stand on its own.

Don’t Believe the Hype About Upfront Bonuses Being "Free Money"

Agents love to promote upfront bonuses to the low information annuity buyer.  They want them to think that it is free money. There are some annuities that ridiculously offer bonuses as high as 30%, but those same annuities are not competitive from a contractually guaranteed standpoint. As a famous rap star once said, “Don’t believe the hype.” When it comes to upfront bonuses, that song lyric definitely applies. acetabula et calculi