In the SEC's own example, a contract with a 4% bonus and 1.75% annual charges grew $10,000 to $22,978 in ten years, while a no-bonus contract with 1.25% charges grew to $23,136 (SEC, Investor Tips: Variable Annuities, modified April 18, 2011).
What a bonus annuity is
A bonus annuity adds an extra amount to your contract when you buy it, figured as a percentage of your deposit. The SEC describes bonus credits on variable annuities as typically ranging from 1% to 5% of purchase payments, and notes the bonus may apply only to the first deposit or to deposits in the first year (SEC Investor.gov, Variable Annuities, checked October 14, 2026). Fixed index annuities are also sold with premium bonuses. Ask for the exact percentage and every condition attached to it.
There are two different kinds of bonus, and the difference matters:
- A premium bonus is added to your account value, the money the contract is actually worth. It is usually subject to a vesting schedule or recapture.
- An income bonus is added only to an income base used to figure lifetime withdrawals from an income rider. It is not cash you can take out. In one 2026 prospectus filed with the SEC, the insurer states that the income base "cannot be withdrawn in a lump sum or paid as a death benefit" (SEC EDGAR, annuity prospectus with a lifetime withdrawal rider, April 27, 2026). See income rider fees.
How it is usually sold, and what the contract says
The pitch is usually "we'll make up your surrender charge" or "you start ahead on day one." The SEC's guidance is blunt: bonus contracts may carry higher expenses that can outweigh the bonus (SEC, Investor Tips: Variable Annuities, modified April 18, 2011). The SEC lists the usual ways the cost comes back:
- Higher surrender charges than a similar contract without a bonus.
- Longer surrender periods.
- Higher annual charges, or a separate fee for the bonus itself (same source).
In a fixed index annuity, which usually has no stated annual charge, the cost more often shows up as lower caps or participation rates than the same insurer's no-bonus version. That is a question to ask, not something the brochure states. Since caps can be lowered after the first term down to the contract minimum (SEC, Updated Investor Bulletin: Indexed Annuities, July 31, 2020), compare the minimums on both versions.
Recapture. Under some contracts the insurer takes back bonus payments made within a set period if you make a withdrawal, if a death benefit is paid, or in other cases (SEC, Investor Tips: Variable Annuities, April 18, 2011). Other contracts vest the bonus over several years, so leaving early forfeits the unvested part. Ask which rule your contract uses.
Disclosure is required. Under the national model disclosure rule, the disclosure document must point out any bonus or introductory part of the rate and how long it lasts, and an illustration must explain any conditions on paying a bonus, reflect rate changes after a bonus period ends, and show the surrender value after bonus forfeitures (NAIC Model 245, Annuity Disclosure Model Regulation, Summer 2021, Sections 5 and 6). Ask for those pages.
The 1035 exchange pitch
Bonuses are often offered to someone who already owns an annuity: "move your money, and the bonus covers your surrender charge." Before agreeing, line up the old and new contracts side by side. The new contract starts a new surrender period, and the bonus may vest over years while the new surrender charge applies right away. FINRA notes that getting out of an indexed annuity in the first 6 to 10 years can mean surrender charges and a loss of principal (FINRA, The Complicated Risks and Rewards of Indexed Annuities, July 14, 2022). See 1035 exchanges and surrender charges.
Seller pay is part of the picture. In the most recent public averages RLF could verify, indexed annuities paid the highest average commission among fixed annuity types (RLF, Annuity Commissions, October 3, 2026). Ask what the seller earns on the new contract, in dollars.
When a bonus can make sense
A bonus is not automatically a bad deal. It can work out when you are certain to hold the contract past the full surrender and vesting period, the caps or rates on the bonus version are close to the no-bonus version, and you have other money for emergencies. The SEC's test is the right one: ask whether the bonus is worth more to you than the extra charges you will pay for it, which depends on how long you hold the contract (SEC, Investor Tips: Variable Annuities, April 18, 2011).
Whatever you buy, the floor still applies: state nonforfeiture law sets a minimum surrender value built from at least 87.5% of premiums at a low guaranteed rate (NAIC Model 805, Fall 2020, Section 4). That floor does not count the bonus.
How to check
- Ask for the disclosure document and Buyer's Guide. If they come after the application, the model rule gives at least a 15-day free look (NAIC Model 245, Summer 2021, Section 5). Your state may give more; see the free-look period.
- Look up the insurer's complaint record with NAIC Consumer Insurance Search and confirm the seller's license with your state insurance department.
- For a variable or registered index-linked annuity, check the seller on FINRA BrokerCheck.
A plain example with numbers
All figures are hypothetical, chosen to show the arithmetic. Assume a $400,000 deposit. Contract A pays a 10% bonus, vests it 10% a year, has a 10-year surrender schedule with a 12% charge in year 3, and, because of lower caps, credits an assumed 3% a year. Contract B has no bonus, a 7-year schedule with a 7% charge in year 3, and credits an assumed 4% a year.
| Hypothetical | Contract A, 10% bonus | Contract B, no bonus |
|---|---|---|
| Day one account value | $440,000 | $400,000 |
| Account value after 3 years | $480,800 | $449,946 |
| Unvested bonus forfeited (70% of $40,000) | -$28,000 | $0 |
| Surrender charge in year 3 | -$54,336 (12%) | -$31,496 (7%) |
| Cash if you leave in year 3 | $398,464 | $418,450 |
| Account value after 10 years | $591,323 | $592,098 |
The arithmetic: Contract A is $440,000 times 1.03 for three years, or $480,800. Take away the unvested $28,000 to get $452,800, then a 12% charge of $54,336, leaving $398,464, less than the $400,000 deposit. Contract B is $400,000 times 1.04 for three years, or $449,946, minus a 7% charge of $31,496, leaving $418,450 (figures rounded to the dollar).
Held ten years, the two end up within $775 of each other: $440,000 times 1.03 to the 10th power is $591,323, and $400,000 times 1.04 to the 10th power is $592,098. In this example, the bonus bought nothing over ten years and cost about $20,000 for an early exit.
Red flags
- "The bonus covers your surrender charge" on a switch that restarts a new, longer surrender period.
- A large bonus with no mention of a vesting schedule or recapture.
- An "income bonus" or "income account" described as if it were money you could withdraw.
- Refusal to show the same insurer's no-bonus version with its caps and surrender schedule.
- An illustration that shows the bonus but not the surrender value after bonus forfeitures.
- A surrender schedule of 10 years or more for money you may need sooner.
- Lower guaranteed minimum caps or participation rates on the bonus version that nobody points out.
- Pressure to sign before you have read the disclosure document and Buyer's Guide.
- Describing the bonus as "free money" or "a gift from the insurer."
- A recommendation to replace an annuity you bought within the last few years.
Questions to ask before you sign
- Is the bonus added to my account value, or only to an income base?
- How does the bonus vest, and what happens to it if I withdraw, surrender or die early?
- What are the caps, participation rates and minimums on this contract versus the same insurer's no-bonus version?
- How long is the surrender period, and what is the charge in each year, compared with the no-bonus version?
- If I surrender in year 3, what exact amount do I get back, after bonus forfeiture and any market value adjustment?
- Does the bonus come with a separate fee or a higher annual charge?
- If I am exchanging an annuity, what surrender charge do I pay on the old one, and how long until the new one is free of charges?
- What do you earn on this contract, in dollars, and on the no-bonus version?
- Will you show me the disclosure page that explains the conditions on the bonus?
- How long is my free-look period in my state?
Read This Before You Sign
A one-page checklist: the red flags in annuity and indexed universal life (IUL) sales, and the questions to ask before you sign anything. Questions to ask about bonus vesting, recapture, surrender charges and caps before you sign or switch annuities. We’ll email it to you.
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Sources
- SEC: Investor Tips, Variable Annuities: What You Should Know (modified April 18, 2011)
- SEC Investor.gov: Variable Annuities (checked October 14, 2026)
- SEC Office of Investor Education and Advocacy: Updated Investor Bulletin: Indexed Annuities (July 31, 2020)
- FINRA: The Complicated Risks and Rewards of Indexed Annuities (July 14, 2022)
- NAIC: Model 245, Annuity Disclosure Model Regulation (Summer 2021)
- NAIC: Model 805, Standard Nonforfeiture Law for Individual Deferred Annuities (Fall 2020)
- SEC EDGAR: annuity prospectus with a guaranteed lifetime withdrawal benefit rider, dated April 27, 2026 (issuer not named on this page)
- NAIC: Consumer Insurance Search (checked October 14, 2026)
The Retirement Literacy Foundation is a 501(c)(3) public charity. This page is general education, not tax, legal or investment advice. Nothing is sold here, no product is recommended, and RLF accepts no funding from financial companies. Rules and figures change; each one above shows its source and date. Check anything you plan to act on with your state insurance department or a qualified professional who is not paid on the product.