As you dive into the world of annuities, you will hear about bonuses. There are 2 different types of bonuses.
One is real money, and one is money that gets added to the income account value. There is nothing wrong with either bonus, but it is important for you to understand how the bonus works for your client.
Real money means that eventually you can draw the cash from that bonus, and when you die, that money goes to your family. This money gets added to the cash value.
For example, if you put $100,000 into an annuity that offers you a 10% bonus, then your cash account value is now $110,000. If you died that year, your family would receive $110,000. If you want to draw 10% from the account, you can withdraw $11,000. It is real money.
Bonus money that is there only to grow the Income Account Value is not “real money.” You can not withdraw that bonus money as
part of your 10%, if you died right away then your family does not receive the additional bonus money because it ONLY goes to your Income Account Value NOT your Cash value.
For Example, if you put $100,000 into an annuity that offers a 30% income account bonus, then your cash value is still $100,000, but your Income Account Value is now $130,000. They use this higher value to give you a higher income payout every year. This can be very beneficial for someone who wants or needs that boost in their income, but understand that if the client dies right away, the family still receives $100,000, not $130,000. If the client wanted to access 10%, they would get access to $10,000, not $13,000. The income bonus is simply there to inflate or boost the income payout every year.
Historically, annuity products that offered a bonus had reduced participation rates and caps, so the growth was very minimal. But now there are products that offer a bonus but still retain decent participation rates and caps. It is important not to be swept up by bonuses and make sure you and your client know how the product works in its entirety.