Understanding Bonus Annuities and Their Benefits

Annuities can provide you with a steady stream of income for retirement, and they come in many varieties. Bonus annuities might catch your eye if you’re interested in getting an upfront bonus or first-year interest rate bonus on your initial investment. These bonuses can typically range from 1% to 10% of your initial investment, depending on the specifics outlined in the annuity contract. It could be important to speak with a financial advisor to verify if bonus annuities align well with your financial aspirations.

What Is a Bonus Annuity?

At its core, a bonus annuity is an insurance product that’s designed to incentivize investors by offering an immediate or first-year, bonus to their annuity balance. This bonus typically falls between 1% and 10% of the initial investment, enabling an immediate boost in the annuity’s value.

Here’s a simple example. Assume you purchase a $200,000 annuity with a 5% upfront premium bonus. The bonus increases the value of your annuity to $210,000 ($200,000 x 5% = $10,000 in added value). An interest rate bonus, meanwhile, would temporarily increase your rate for the first year of the contract.

Premium bonuses are typically associated with fixed index annuities, while interest rate bonuses are more common with traditional fixed annuities. Insurance companies can use bonus annuities to attract new investors, or encourage annuity owners to transfer their contracts. The main thing to keep in mind with bonus annuities is how the value of the bonus compares to the contract’s long-term growth potential.

Pros and Cons of a Bonus Annuity

Bonus annuities, like all financial products, come with pros and cons, which can materialize differently depending on specific individual circumstances. It’s worth evaluating both sides of the coin before understanding if this is the right option for your investment needs.

In terms of the advantages, bonus annuities can:

Provide immediate value to your investmentGenerate potentially higher returns than other types of investments
Add stability and predictability to a retirement income plan

However, it’s incorrect to assume that bonus annuities are intrinsically superior to other investments. As far as the downsides go, bonus annuities typically:

Have longer surrender periods, meaning you may need to wait longer to withdraw funds without a penalty
Carry higher fees than other types of annuities
Have a more significant tax impact.

Who is a bonus annuity right for? They could be a good fit for investors who want to see an immediate value increase on their annuity contract. Bonus annuities may also benefit those who are concerned about estate planning or individuals in higher tax brackets.

What Are Bonus Fixed Annuities?

A couple looking at annuities with a bonus.

Bonus fixed annuities offer a fixed rate of return. It’s essentially just a typical fixed annuity that pays a bonus. This implies the interest rate is set at purchase and remains constant throughout the annuity’s life.

Fixed annuities and fixed indexed annuities sound similar but differ in how they deliver returns to investors. With a fixed indexed annuity, your growth potential is tied to the performance of an underlying stock market index. For example, you might have a fixed annuity that’s indexed to the S&P 500.

Both fixed and fixed indexed annuities can offer predictable returns and steady income for retirement. Between the two, indexed annuities tend to carry more risk, since earnings depend on which way the market moves. However, these annuities can offer a guaranteed rate of return, with built-in protection against losses.

Fine Print of Bonus Annuities

The upfront bonus in a bonus annuity is not necessarily free money, as there may be strings attached. For instance, many contracts require you to keep the annuity for a longer surrender period, sometimes 10 years or more, before you can withdraw funds without a penalty. In some cases, if you withdraw early, part or all of the bonus can be taken back by the insurer.

The bonus may also be offset by lower interest rates in later years. For example, the insurer might offer a 5% upfront bonus but set the ongoing credited rate below what you would receive in a comparable non-bonus annuity. Over time, this can make the overall return less competitive.

Some bonus annuities also apply vesting schedules to the bonus, meaning you only keep a portion of it if you cash out before a certain number of years. For instance, you might be entitled to 20% of the bonus after three years, 50% after five years, and 100% only after the full vesting period.

Because of these requirements, it’s important to calculate the net benefit of the bonus compared with a standard annuity. For some investors, the upfront boost may look attractive but could result in lower overall income once fees, interest rates, and surrender restrictions are taken into account.

Feature	Bonus Annuity	Standard Fixed Annuity
Upfront Bonus	1% – 10% of initial investment	None
Interest Rate	Often lower after first year	Typically higher, steady rate
Surrender Period	Usually longer (7–12 years)	Shorter (5–7 years)
Bonus Vesting	May apply; bonus reduced if withdrawn early	Not applicable
Long-Term Value	Depends on contract; bonus can be offset by lower crediting rate	Generally more predictable growth

Other Considerations When Selecting the Right Annuity

Annuities can sometimes be complex in nature, particularly when you’re venturing into bonus annuity territory. Beyond the pros and cons, there are other things to consider to decide which annuity may suit your needs. They include:

Your income needs now, and in the future
Risk tolerance and risk capacity
Fees involved with the annuity
Surrender periods
Potential tax implications

The reputation of the insurance company issuing the contract also matters. If the annuity issuer is in poor financial health, that could increase the risk that it won’t be able to pay out your annuity benefits to you later. Comparing annuity credit ratings can help you evaluate the financial strength of any company you’re considering.

A financial advisor can provide valuable insights, taking into account all these factors and assisting you in crafting a plan that aligns with your needs. If you’re on the fence about whether an annuity is even right for you, this might be the best place to start.

Bottom Line

A couple talking to a financial advisor about bonus annuities.

Supplementing your investment portfolio with a bonus annuity can potentially be a strategic move for bolstering your financial plan but it’s not right for everyone. The costs and other requirements may outweigh any upfront value you receive. A thorough understanding of the product, an in-depth review of your financial circumstances and a chat with a trustworthy financial advisor can help you make an informed decision about whether an annuity is right for you.

Tips for Retirement Planning

An effective way to prepare for retirement is to create a plan and follow it step by step. A financial advisor can work with you to set and reach different financial goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
You may want to use a retirement calculator to help you see if you are saving enough for retirement.