Last week's post, 8 Questions to Ask Yourself When Analyzing Premium Bonuses, introduced a series of questions when considering the purchase of a fixed index annuity ("FIA") with a premium bonus. The first three questions were answered last week.
This week's post addresses questions #4 and #5, dealing with premium bonus percentages as follows:
- What percentage should I expect to receive?
- Why not purchase the product that offers the highest percentage?
What Percentage Should I Expect to Receive?
Per last week's post, a premium bonus isn't an inherent component of every FIA contract. Of the 267 FIA's on the market today, 138, or approximately 52%, include a premium bonus feature.
Per Exhibit 1, of the 138 FIA's offering premium bonuses, bonus percentages range from 0.5% to 30%. 130 of the 138 products, or approximately 94%, offer bonuses between 0.5% and 10%.
Approximately 26% of all premium bonuses pay 0.5% - 4%, 32% are right at 5%, and 36% are between 6% and 10%. The sweet spot is 5% - 10%, with 68% of all premium bonuses falling into this range.
Why Not Purchase the Product That Offers the Highest Percentage?
What about the eight FIA's that include bonuses greater than 10%? There are four that pay 12% - 17%, one is 20%, two offer 25%, and there's one paying 30%. Why not choose one of these products? As usual, it gets back to the old saying, "There's no free lunch."
In addition to the eight questions you should ask yourself when analyzing premium bonuses, there are two other things to consider any time you're analyzing a FIA with a bonus percentage greater than 10%:
- Financial strength of the issuing company
- Timing of payment of the bonus
Financial Strength of the Issuing Company
Fixed index annuities by their nature are long-term investments. If you're 50 years old, married, in good health, and you purchase a FIA with an income rider, there's a good chance that either you or your spouse will live well into your eighties, if not nineties.
While life insurance companies as a whole enjoy an excellent historical track record when it comes to fulfilling their contractual commitments, including annuity payouts, you want to choose a company that has the highest ratings from the three major ratings services: Standard & Poor's, A.M. Best, and Moody's. This is especially important when evaluating FIA's with income riders.
Of the eight FIA's that offer premium bonuses greater than 10%, five of the eight products are offered by two life insurance companies with less than excellent ratings. That's an immediate deal killer for me when I'm analyzing FIA's for my clients.
Timing of Payment of the Bonus
Per last week's post, the vast majority of premium bonuses are payable on investments during the first contract year. In addition, several products also pay premium bonuses on subsequent years' investments for a specified number of years.
One of the eight FIA's that pays a premium bonus of 20% is offered by a highly-rated insurance company. Unlike the vast majority of other premium bonuses in the marketplace, this one isn't calculated on the initial investment or subsequent years' investments. It is instead applied to income withdrawals and is only available at the end of ten years.


