Some insurance companies declare a “bonus” rate of interest that will be paid on top of a current or “base” rate offered on an annuity contract. This bonus is designed to attract new business to the insurance company. The bonus amount offered by many insurance companies can range from one percent to five percent of the original single premium payment. For example, if an applicant purchases an annuity with a single premium of $100,000, and the extra credit sign-up bonus is 5 percent, the account value will be $105,000. Some insurers may credit the bonus with the initial premium payment and or may credit the premium payments made within the first year of the annuity contract. Under some annuity contracts, the insurer will take back all bonus payments made to the annuity holder within the prior year or some other specified date, if the annuity holder makes a withdrawal, if a death benefit is paid to the annuity holder’s beneficiaries upon the annuitant’s death, or in other circumstances.
Though this feature is attractive, there might be some hidden costs. Some companies charge extra fees and/or extend surrender periods. Some contracts may impose higher mortality and expense (M&E) charges, while others may impose a separate fee specifically to pay for the bonus feature. As the insurance producer, it is your responsibility to understand these costs and fully disclose to the purchaser of an annuity.