Some policies increase the initial annuity deposit with bonus interest. This is in effect an advance from the insurance company that increases your savings and earns additional interest.

For example with a 5% bonus, instead of a $10,000 deposit, the account is increased by $500 to $10,500 on the first day of the deposit. The new amount earns both minimum interest and indexed bonus interest. If the account accumulates at 9% for ten years, the total return will be 9.52% on the initial contribution.

Sometimes there are access limitations placed on the bonus amount, at other times the regular policy features, such as increased surrender charges, protect the bonus for a period of time. The increased surrender charges of a bonused annuity deter some annuity buyers, but these increased charges need to be considered in light of the bonus itself. Often the net charges (surrender less the premium bonus) are not much worse than a non bonused annuity.

For example compare two popular annuities: one a 7 year with no bonus and a 10 year annuity with a 5% bonus. Both are point-to-point. The surrender schedules are as follows:

If we subtract the bonus from the surrender schedule, the 10 year annuity turns into a 9 year annuity and the surrender penalty for the 10 year product is only 1% over the 7 year. Don’t pass up a nice bonus just because of a higher surrender. Subtract out the bonus and use the net surrender to make your buying decision.