Response: Thanks so much for the questions Sonja...there is plenty of dirt on the topic of annuity bonuses. It's interesting how even some of the most well read investors when you ask them why they purchased a particular annuity the first thing out of their mouth more often than not is "well I was paid a bonus". Wearing this like a badge of distinction as if they were so crafty they outwitted the insurance company and beat them like the gambler who is going to take down a Las Vegas casino. First off, there is no "getting over" on the insurance company. If you haven't notices, these are for profit companies and aren't in the business of giving money away. Having said that, I normally discourage my clients from entertaining a bonus annuity product as I do with most other annuity riders. Why?... because after the thrill of "being paid" wears off typically in the long run they end up costing YOU money. Let's take a look.
When you are paid a bonus it's either paid to you in cash, added to your deposit or if you have an income rider, it's added to your income account. The difference between the two is extreme. Funds in an "income account" or "income rider account" not only are costing you in fees which have a negative affect on the earnings of your actual cash value, but you typically either need to exercise that income rider or annuitize the contract to realize that value. I've seen cases where bonuses were used to offset surrender fees coming out of another annuity contract and the bonus was paid to the income rider account, not the cash value... this should never happen. Rule number one, don't own a rider that you aren't prepared to use at some point otherwise you are just tossing money away.
The alternative to being paid into an income rider account is when that bonus is added directly to your cash value.. a much better situation since that is real spendable money, but there are downsides here as well. Normally when you are paid a bonus is cash there is something called a "bonus recapture" schedule. It's a vesting schedule much like the surrender charge schedule on your annuity but it applies to your bonus. If you leave early, you give it back, it's that simple.
The questions that must be asked when you are being enticed with a bonus are:
Carl Barnowski has 25 yrs. of experience as a retirement income expert specializing in principal protected annuities.