Bonus annuities: the surrender schedule nobody reads

A 10 percent premium bonus looks like free money on day one, and it's the reason some of the worst-fitting annuities get sold. The bonus is paid for somewhere, and the somewhere is usually the surrender schedule and the caps.

How the bonus is recovered. Longer surrender periods, higher early surrender charges, lower caps or participation rates, and in some contracts a bonus recapture if the client surrenders or annuitizes early. Read the recapture language. A client who leaves in year four can lose the bonus and pay the surrender charge on top.

When the bonus genuinely helps. A client moving out of an annuity with a remaining surrender charge can use a bonus to offset that charge. That's the legitimate use. The comparison has to include the new contract's caps against the old one's; a bonus that erases a 4 percent surrender charge but drops the cap from 8 to 5 percent isn't a win over ten years.

The illustration trick to watch. Bonus contracts illustrated at the max rate look spectacular in year one. Illustrate the non-guaranteed column at a low rate and the guaranteed column alone; if the client wouldn't buy it on those numbers, the bonus is doing the selling.

What to tell the client. "The bonus is real, and here's what you're giving up to get it." Then the surrender schedule, year by year, read out loud.

Reviewer angle. Suitability reviewers see bonus contracts on replacements constantly. Your rationale should explain why the bonus contract is better after the surrender period, not just on day one.

Anyone placing bonus contracts this year where the caps still made sense? Which carriers?