If you are in the market for an annuity, you may want to consider a product that offers a first-year bonus “teaser” rate. This is a great way to get a higher yield on your investment in the early years of the contract. In this guide, we will discuss what first-year bonus rates are, and how they can benefit you as an annuity buyer.
What is a First-Year Bonus “Teaser” Rate?
A first-year bonus rate is a variant of the traditional declared-rate interest-crediting approach that insurance companies use to boost their marketing efforts. This type of annuity is generally referred to as a bonus annuity.
A bonus annuity is a deferred annuity in which the interest rate credited in the first year or first several years is greater than the current rate that the insurer expects to credit in later years. The difference between these rates is known as a bonus. The bonus offered by insurers selling bonus annuities can range anywhere from 1 percent (fixed annuities) to as high as 15 percent (fixed index annuities).
Researching Insurance Companies
Some insurers, on the other hand, may inflate the bonus they credit and then credit below-market interest rates in subsequent years before increasing costs to recoup the incentive.
Examine the insurer’s bonus annuity renewal interest crediting rate history and compare it to other annuities that do not have a bonus feature.
Why Do People Buy Annuities With First-Year Bonus “Teaser” Rates?
The guaranteed rate of return on a teaser annuity can be used to help move money from different savings and investment vehicles. This bonus, paid in the first year, may inspire a client to send funds into an annuity that he or she would otherwise be hesitant to transfer because of:
- surrender charges in an underperforming annuity
- losses in the stock and bond market
- high fees
- penalties in certificates of deposit
- losses in mutual funds
- tax liabilities
Disadvantages To Bonus Annuities
In certain bonus annuities, achieving the higher first-year interest rate might be contingent on obtaining a particular condition. Examples include:
- Only if the contract owner makes no withdrawals other than earnings for a certain length of time is he or she eligible to receive the higher interest-crediting rate.
- Two-tiered annuities in the past have credited the higher first-year rate if the contract is annuitized in the future.
- To secure the bonus, annuities may demand that the contract be maintained for an extended period beyond the surrender charge period.
The following are some of the terms that you should look for if you’re buying a contract. They don’t always imply that the contract is unwanted; they do, however, need to be considered before making a purchase.
Bonuses On Flexible-Premium Annuities
Flexible premium annuities may credit an additional interest rate, referred to as a bonus rate, to all premium payments made only during a certain time period within the surrender charge period. The disadvantage of these periodic bonuses is that the interest-earning potential after this “bonus period” ends is less than a customer might anticipate initially.