There is no free lunch. If an annuity company want to pay you "more than usual," there is often a trade-off.
Bonuses, adding capital to your annuity and some other inducements are offered as part of annuity company marketing strategy to sell their annuities. As these techniques are found rewarding (they give the annuity company agents something extra to offer their prospect--YOU), many companies providing annuities also often-times introduce different incentive schemes to induce the prospective customer into acquiring their annuity. One of the most commonly used campaign strategy is holding out the extra rate, called bonus rates. But unless you are guarded, you might turn out to get less than you expected.
The normal practice is to provide the new investor a bonus rate during the first year or first few years after you purchase the fixed annuity and this can meaningfully increase the initial financial return. Besides, the bonus also enhances your account's principal amount where future interest will be paid. For that reason, it is clear that a benefit can certainly enhance the financial attractiveness of the annuity company contract.
Here is a typical annuity company bonus rate offer. The transaction will likely be that if you invest $50,000, the annuity company will credit an upfront bonus of 5% interest at the time of deposit (5% times $50,000 = $2500). Thus, all future interest accumulations will be on $52,500 - which is tempting without a doubt!
But the fact remains that the providing annuity company offers the bonus presumably as an enticement to get you as an investor and then must somehow pay for this money they give you. Typically, they earn back that upfront bonus by locking you into a low rate later. If you prematurely withdraw your current investment in less than 10 years (a typical annuity term when bonus rates are offered), you may be susceptible to heavy surrender charges that would negate the bonus you received. Further, some annuity companies which make heavy use of bonus rate offers eliminate other features from the contract such as elimination of surrender charges on withdrawals for terminal illness or nursing property confinement.
Please know that any annuity company - to offset the bonus interest - typically provides a lower rate later. Once you are locked in by the 10 year schedule of heavy surrender charges, the annuity company is free to lower your interest rate every year after the attractive first year. The potential "less than competitive" rates in years 2-10 could easily offset any benefit of the bonus rate.
There can be no doubt that the financial return on your investment is crucial and a bonus can be quite a good booster. But it is not prudent for you to disregard the financial soundness of the annuity company or other benefits that annuity contracts typically include and the annuity company's interest rate track record.
As we started this post: 'there isn't such thing as a free lunch'. That should make you realize that b0nus rate annuities will invariably carry higher costs and charges than annuities without a bonus. This apart, the particular surrender period is generally lengthier, resulting in potentially increased surrender fees if you make excessive withdrawals prior to the end of the term. Ask for and get the interest rate history of any annuity company you consider.
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