Among variable annuities, “bonus” annuities are gaining ground. They give you an extra 3%-5% for investing. For example, with a 5% bonus annuity, you could invest $40,000 and receive $42,000 in your account upfront.
The catch? Bonus annuities lock you in: you probably will face surrender charges for 9 or 10 years, declining from 8.5%. Annual costs are higher, too. Thus, if you’re shopping for a variable annuity, you’re probably better off with a low-cost version from TIAA-CREF or Vanguard.
However, a bonus annuity may make sense if you want to upgrade from an older annuity where surrender charges still apply. Similarly, a bonus annuity might work if you have been locked into a fixed annuity and want to switch to a variable annuity for potentially greater returns. In such circumstances, the upfront bonus can offset the surrender charge you’ll incur by switching annuities.