Its typical for companies of all types to offer discounts, financing for extended periods of time and such some other inducements to sell their product. As these strategies are found rewarding, many companies supplying annuities also introduce numerous incentive schemes to induce the prospective customer into getting their annuity. One of the most commonly used marketing strategies is offering bonus annuity rates. But unless you are guarded, you might wind up not getting what you expected.
The normal practice is to offer an annuity having a bonus annuity rate during the first year or perhaps the first few years after you choose the fixed annuity and this can meaningfully increase the overall return. Additionally, the initial bonus annuity rate added to you investments enlarges the annuity's principal amount on which future interest will be paid. As a result, it is clear that the bonus annuity interest enhances your financial return.
For instance, the transaction will probably be that if you invest $75,000, the annuity rates affected will provide an additional 5% interest at the time of deposit (5% by $75,000 = $3750). Thus, future interest payments will be on $78,750 - which is tempting certainly!
But the fact remains that the companies giving bonus annuity rates offer the bonus in order to attract investors which can then be locked in. If you make withdrawals, more than the typically permitted 10% in any year, you may be at the mercy of of very high surrender charges. Annuities that offer bonus annuity rates are often accompanied by longer and higher surrender charges. These could easily negate the benefit bonus annuity interest. Further, some annuity contracts which provide bonuses may not offer some common annuity characteristics like exemption from surrender charges upon death of the annuitant, for fatal illness or nursing home confinement.
Even if you have no intention of withdrawing more than the annual permitted amount, there may be another issue that arises with companies offering bonus annuity rates. Once you are locked in for say 10 or 15 years, why should they keep the annuity rate competitive? Why not drop is to the minimum, say 2.5%, as you, the investor, are locked in by onerous surrender charges.
There can be no doubt that the earnings on your investment are crucial and bonus annuity rates could be a good earnings booster. But it is not prudent to disregard the financial soundness of the annuity company. Make sure you are dealing with a sound company. The agent can provide you with safety reports.
They say "there is no such thing as a free lunch," and so it may be with bonus annuity rates That should make you realize that extra annuity rates will invariably carry higher charges than annuities without the extra interest. Or, the higher rate may be indicative of an underlying financial problem. Investigate well.