Assess An Annuity Bonus’s Value Before Recommending It
Do interest bonuses add value to an annuity contract? The answer, unfortunately, is “not always.”
Many registered representatives and clients share a misperception that when an insurance company supplements contributions made to an annuity, this can only provide value. Some even think that since there is no explicit charge, the bonus is free.
Recently, for example, a rep approached me in search of a bonus annuity. When I explained that our product typically charges 0.15% for each 1% bonus added to the contract, she was shocked. Why, she wondered, would there even be a charge for such a feature?
I was shocked, too. I was shocked that she actually believes companies that bundle bonus features into an annuity and bury the charge in its mortality and expense charge are actually giving money away.
To my way of thinking, the old adage, “there is no such thing as a free lunch,” holds true with bundled bonus annuities.
If you examine such contracts, you will often find two important aspects in the design:
1) They typically include a 1.40% to 1.45% M&E and administrative charge for a standard death benefit, providing return of premium or current account value. (Source: Our analysis of VARDS top 25–YTD 12/31/01–non-group variable annuities, 12 of which have bonus features.) This represents a surcharge of .40% to .45%, assuming no other benefit is bundled in the M&E.
2) This surcharge is imposed for the life of the contract.
I liken such a design to the Energizer Bunny: It keeps charging and charging.
So, how or when does the client receive value? Sometimes never. It depends on how long the client stays invested in the contract and what real rate of return they earn on the bonus amount credited to their contract.
What some reps and clients do not understand is that a bonus represents an advance of funds credited to the contractan advance the insurer ultimately wants repaid. Unfortunately, with some designs, the M&E surcharge far exceeds the repayment of the bonus and the cost of providing the benefit at a fair return.
If you agree that a bonus is an advance from the insurer for a specified period of time, then you should question the value of products that, in effect, require repayment that continues through the life of the annuity and are based on appreciating account value.
What is to be done? My suggestion: Each rep should assess the value (or lack of value) of the annuity bonus by asking the insurer to disclose answers to questions posed in the chart on this page.
Next, assess whether earning that rate of return is reasonable, under the expected market conditions for the intended payback period. If it is, then go for it!
If not, don’t recommend the client purchase the feature. Instead, shop around. Many insurance companies are now offering a variety of bonus options as riders. The costs are often discontinued after a stated period of timeoften after the surrender charge period ends. Some insurers also cap the cost of the feature, so the client can truly benefit in a rising market.
Despite the pitfalls of some bonus designs, they can provide real value to customers. Its up to the rep to know how and when. If they add value and address the customer’s needs, then add the feature!
David L. Anders, CLU, ChFC, is senior vice president of Integrity Life Insurance Company, Cincinnati, Ohio. His email address is danders@ integritycompanies.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, June 10, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.