Clearing up the Annuity Bonus Confusion

Joe Elsasser, CFP®, President of Covisum
August 15, 2019
    

Bonus. Sounds great, right? It sounds like “extra.” Getting a bonus is a good thing… right?It’s easy to understand why bonus annuities can be appealing to consumers. For years, annuity carriers have offered bonus annuity contracts, offering an up-front dollar figure that’s added to the account value, usually upon issue of the contract. This bonus amount is commonly based on a percentage of premium. For example, if an annuity is started with an initial $100,000 premium, and the bonus is 10 percent, then $10,000 will be added to contract value on day one for a total contract value of $110,000.

Help Your Clients Understand the Value

If your clients have purchased or are considering purchasing an annuity because the bonus seems appealing, it’s very important to clearly articulate the full scope of that decision. Financial advisors play an important role as educators. Providing expertise in an educational way helps build trust and your business. Annuity bonuses offer an opportunity for you to clear up the confusion and make sure that your clients are choosing the best product(s) to help them reach their retirement goals.

Consumers love a quick return on investment (and really, advisors do too!). In the scenario above, for example, it appears that the consumer essentially received an instant 10 percent increase of their premium. In reality, this is not free money. It is an advance of money given against future earnings on the contract.

The goal of an insurance company is to turn a profit. As such, if they provide an advance bonus to clients, then something has to occur within the annuity product so that the product remains profitable to the insurance carrier. In many cases, the future earning potential of the product is curtailed. Additionally, surrender charges may have longer duration and a higher percentage compared to non-bonus annuity alternatives. 

To add to the confusion, bonus annuities don’t attribute the bonus to the account value in every situation. In some instances, the bonus may only be attributed to a living benefit rider value. Living benefits are used in annuity contracts to offer lifetime income (usually without annuitizing the contract). Living benefit rider values do not represent a tangible dollar amount that the client can take from the contract. They usually represent a number used to calculate how much the client is allowed to take in lifetime income per year. This non-tangible living benefit rider figure has tripped up clients since their inception.

Additionally, many insurance carriers’ suitability rules require a client who is looking to transfer or rollover an older annuity into a new one, a bonus must be present on the new product if surrender charges exist on the old one. The bonus must meet or exceed the amount of that surrender. This further confuses clients who think that by getting a bonus, they are somehow getting a better product, when in reality, they may be trading in their old product for one that offers less growth potential over time due to the bonus being added.

There are situations where a bonus annuity serves the client well. If the client is in a situation where getting an advance on earnings helps them meet their goal more effectively, then using a bonus annuity can be a valid strategy.

Communication and education are key. Misunderstandings can easily occur if a client does not understand all the parameters surrounding the use of a bonus annuity as part of their overall portfolio. Take the time to inform your clients about the ramifications that a bonus annuity could have on their future goals, and ask the important questions:

  • Explain the surrender schedule. Does it work for the client?
  • Does the bonus help the client meet their goals more effectively? 
  • Does the client fully understand to what values the bonus is applied, and in what situations it can be lost? For example, is it a bonus on the income value only or is there a different bonus amount on the base product? Are there versions of the product without a bonus that have different growth opportunities or strategies? How do withdrawals impact the bonus?

It’s important to keep in mind that many clients considering bonus annuities don’t fully understand the stipulations of the product. Advisors can add a lot of value to their clients by clearing up the misconceptions about bonus annuities and helping the client choose the best product to help them achieve their goals.

Income InSight® can help you analyze your clients’ entire portfolio, including annuities. Add existing annuities or create an alternate strategy to show how a new annuity would affect the overall plan. Watch a demo of Income InSight.

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Posted by Joe Elsasser, CFP®, President of Covisum
Joe developed Social Security Timing® in 2010 because, as a practicing financial advisor, he couldn’t find a Social Security tool that would help his clients make the best decision about when to elect their benefits. Inspired by the success of Social Security Timing, Joe founded Covisum®, a financial tech company focused on creating a shared vision throughout the financial planning process. In 2016, Covisum introduced Tax Clarity®, which helps financial advisors show their clients the hidden effective marginal income tax rates that can significantly impact cash flow in retirement. In early 2017, Covisum acquired SmartRisk™, software that allows advisors to model “what-if” scenarios with account positions and align a client’s risk tolerance with their portfolio risk. Covisum powers some of the nation’s largest financial planning institutions and serves more than 20,000 financial advisors. Based in Omaha, Nebraska, Joe co-authored “Social Security Essentials: Smart Ways to Help Boost Your Retirement Income,” is a regular speaker at industry events and is frequently interviewed by trade and national media.