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Bonus annuities can play an important role in the annuity portfolio of most agents. They can serve agents well in the role of rescuing clients from financial products that are performing poorly. Unfortunately, bonus annuities are often misused. The information presented in this document is intended to show agents both the features as well as the restrictions associated with today’s bonus annuities.

Question: What annuity product could help an agent move a client out of an existing annuity contract which still has surrender charges and is paying noncompetitive interest rates or is from another financial vehicle (such as a mutual fund) with a poor performance?

Answer: A Bonus Annuity could be the perfect solution.
Consider the following problem. This example is designed to illustrate a possible use of a bonus annuity.

Problem: Your client has an existing $100,000.00 annuity paying 5% interest and a current surrender charge of 4%.

Consequently: Account Value with present annuity = $100,000.00

Currently Crediting 5% interest
Currently 3 years into a 7-year contract with 4% surrender charges, in effect (7%, 6,5,4,3,2,1)
Surrender Value = $96,000.00

Solution: “The Great American Advantage 15” it includes a base rate of 6%, plus a 15% annuity bonus. Producing a 21.90% first year yield.

In the above problem, even though the client would experience a 4% surrender charge, the Advantage 15 would more than offset any penalty. The Advantage 15 would produce a net effective yield (taking the 4% surrender charge into account) of 17.90%, plus a new competitive base rate of 6%. Looking ahead 5 years, the projected account value is $147,740.00 with the Advantage 15 versus the $127,628.00 your client would have if he or she elected to stay in their present contract with the present annuity company (assuming base rates remained at 6% and 5% respectively).

Consider the following spectrum of bonus products and flexibility:

Interstate:	Freedom-Income “Most Flexible”	No Requirements optional Annuitization / Bonus
Great American:	Advantage 15	Hold contract 12 years, or annuitize after 5th year for at least 7 years
Great American:	GALIC+5	Annuitization or die with contract Requires
Allianz/LifeUSA:	Bonus Max/10% Cash. “Least Flexible”	Annuitization or take “quasi” interest only To receive full account value on death beneficiary to annuitize

Two Questions To Keep In Mind When Considering The Use Of Bonus Annuities:

What does the client have to do in order to receive the bonus?
What is the client giving up in order to get the bonus?

Taking the spectrum of products in the order of flexibility, the most common considerations are below:

Interstate’s Freedom Income is the most flexible because you are not giving up anything in order to receive the 5% bonus. In order to receive the bonus you need to annuitize the contract. You are not forced to take interest only or annuitize or stat in the contract for a given number of years. The client has the flexibility to: take interest only, take a 10% free withdrawal, hold the contract until the end of the surrender charge(s) and keep the entire accumulated value, or annuitize and receive a 5% bonus on the accumulated value.
Great American’s Advantage 15 is a fantastic product with a 15% bonus. This product requires the owner to simply stay in the product for 12 years (as it has a 12 year declining surrender charge schedule), or if the client does which to annuitize – annuitize anytime after the 5th year for a period of 7 years or longer. If the client chooses, he or she may elect to take interest only or take a free 10% withdrawal every 12 months. The money is not tied up forever and it gives a very competitive interest rate. This product provides great liquidity and after 12 years the client can walk away with the full account value.
Great American’s GALIC + 5 is a nice clean product with a 5% bonus. This product requires the client to annuitize anytime after year 2 for a period of 7 years or longer, or simply hold the product until death. Upon death of the owner, the GALIC + 5 pays a lump sum t the beneficiary (including the 5% bonus). This contract has great liquidity features such as a free 10% withdrawal every 12 months. If the client chooses to receive interest only. The GALIC + 5 pays a very competitive interest rate.
Allianz/Life USA has both the 10% Cash Bonus Annuity and the Bonus Max. Both products have a 10% that are appropriate for mature clients who are looking for great accumulation values while at the same time have made the decision to annuitize or take a payout over 10 years or lifetime at some point in the future. The product is flexible so it will accept future deposits, which will be credited with the bonus. It is important to understand that these contracts require the client to annuitize or to take a “quasi” interest only payment for a period of 5 years. If the client elects to receive this “quasi” interest only payment for five years than after those five years he or she may walk away with the full accumulated/annuitization value. American Brokerage Services, Inc. does not recommend the client take this “quasi interest onl payment” for 5 years in order to walk away with the accumulated/annuitization value. We do recommend the product as an accumulation product when the client has made a decision to annuitize the product at some time in the future.

Products and features will change over time. We hope this information gives you a better understanding of what these products can and cannot do. Please feel free to contact us regarding a bonus annuity that will work for you and your clients’ specific situation.

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