Some fixed indexed annuity contracts add a bonus — an extra amount credited to the premium or to the account, on top of later index interest. Advertisements lead with that number because it is easy to see. The number is also the wrong place to stop reading. This page does not state a typical bonus, a typical vesting schedule, or a typical cost, because regulators have not published a single figure that would make those words true, and inventing one would be misleading.
What you can verify without a percentage
A bonus, if the contract has one, is defined in the contract. It might be added when you pay the premium. It might be described as a percentage of the premium. It might apply only to premiums paid in a window of time. It might not exist at all. The first question is binary: does this contract include a bonus, and on which dollars? If the answer is no, the rest of this page is background for the next proposal you see, not a description of the contract in front of you.
The second question is what happens to the bonus if you leave. Some contracts vest the bonus over time, reduce it if you surrender, or recapture it. This site cannot tell you that yours does. It can tell you to find the sentence that says what happens to the bonus on a full surrender in year one, year five, and the year the surrender charge hits zero. If the bonus disappears on surrender while it still shows on an illustration of income, you are looking at two different values. Income-rider values and cash values part ways often. The NAIC Buyer’s Guide makes that general point about living benefits: lifetime income under a rider is not the same as cash surrender value. A bonus that inflates one of those numbers may not inflate the other. Read both columns.
A bonus does not replace the index formula
After the bonus is applied, interest still comes from the index method, the cap, the participation rate, or the spread. The SEC’s hypotheticals are the right way to think about those limits, and they are not changed by the existence of a bonus. A 7 percent cap on a 12 percent index change is still a 7 percent credit in that illustration. A bonus credited once at the start is not an annual 7 percent. People add the bonus percentage to the cap and talk about the sum as if it were a yearly rate. That addition is not how the contract works unless the contract says something very unusual, and you should assume it does not until you see the formula.
FINRA’s 2022 article is the other half of the warning: the insurer may change caps, participation rates, and spreads on later terms. A bonus that is guaranteed at issue does not freeze those later limits unless a separate guarantee says so. When you compare a contract with a bonus to a contract without one, compare the renewal guarantees and the surrender schedule, not the bonus line alone.
Questions that keep the bonus in proportion
Ask whether the surrender-charge period is longer because of the bonus. Do not accept “bonuses always lengthen the schedule” from this site; that would be a generalization. Accept only the schedule printed for this contract, and ask the producer to show a version of the same insurer’s contract without the bonus if one is sold. If they cannot, you simply have one contract to judge on its own papers.
Ask whether the illustrated income, the death benefit, and the cash surrender value all include the bonus. Ask whether a free-withdrawal provision, if any, is calculated on premium before the bonus or on account value after it. The NAIC’s example of a charge-free withdrawal — often described as usually up to 10 percent, and only on some contracts — is a reminder that “10 percent” needs a base. Ten percent of a larger, bonus-inflated number is a different dollar amount than 10 percent of premium. Either figure can be absent from your contract.
Ask what the bonus does inside an IRA. If the annuity is funding a traditional IRA, the bonus is not a tax deduction. The contribution limits and the required-distribution rules are the IRA’s rules. FINRA notes that an annuity inside a retirement plan usually does not add extra tax deferral. A bonus does not create a deduction the Internal Revenue Code did not give you. Tax details are on the tax page, and they stop short of listing every exception to the additional 10 percent tax.
How not to use a bonus in a decision
Do not treat the bonus as yield you have already earned. Do not subtract it from a surrender charge in your head and decide the charge is “really” smaller, unless the contract’s surrender formula actually computes that way. Do not let a title on a book or a line in an advertisement supply the percentage. The books linked in the rail are optional reading. Their titles are marketing. They are not a rate sheet.
If the only reason a proposal looks better than a declared-rate fixed annuity or a certificate of deposit is the bonus in year one, go back to fixed versus indexed and indexed versus CD and compare liquidity and guarantees with the bonus set aside. Then put the bonus back in and see whether the decision changes for a reason you can explain without the sales illustration.
Sources
- National Association of Insurance Commissioners, Buyer’s Guide for Deferred Annuities (revised 2013)
- U.S. Securities and Exchange Commission, Updated Investor Bulletin: Indexed Annuities (July 31, 2020)
- FINRA, The Complicated Risks and Rewards of Indexed Annuities (July 14, 2022)
- FINRA, Annuities