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.