New “bonus” variable annuities: gimmick or free money?
Bonus annuities, as the name suggests, give you a little something extra for buying a tax-deferred annuity. When they were introduced a few years ago, 3% and 4% bonuses were the norm; that figure has increased to 5% in some cases. Thus, for every $10,000 invested, you might receive $10,500 in your account upfront. There are tradeoffs, though:
Bonus variable annuities may have surrender charges in effect for nine or 10 years, declining from 8.5%, while other variable annuities impose surrender charges for seven years, starting at 7%.
Death benefits also may be less attractive. Bonus annuities may offer to return whatever is higher: the contract value or the premiums you’ve paid. Other variable annuities these days commonly offer some mechanism for ratcheting up the minimum death benefit over time.
Costs are higher with bonus variable annuities. While the average annual insurance expense for variable annuities is about 1.25% (before asset management fees), bonus variable annuities add anywhere from 0.30% to 0.65% per year. Generally, the higher the bonus the greater the extra fees.
Insight: Long-term, paying an extra 0.30% to 0.65% a year may cost you more than the value of the 3%-5% upfront bonus.
