The complexity surrounding annuities can be overwhelming when trying to navigate through the many options available and unfortunately, the decoding process is not always as easy as filtering through your favorite online retailer. This is just one reason why it is so important to work with a licensed financial professional that understands the ins and outs of annuities and more importantly, your specific financial situation.

In this episode of Money Script Monday, Luke breaks down the different types of annuities and the three bonuses available to help maximize the return on your investment.

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Video transcription

Hello, my name is Luke Geller, and I want to welcome you to another edition of Money Script Monday.

Today we're going to be talking about the different types of bonus options inside of annuities.

The reason I want to talk about this subject is because it can be pretty complicated inside some of these different products that are available.

And if you don't know exactly what you want or if you know what you want, but aren't sure what's inside this product, you could be in for some surprises later on.

What I liken that to and what I kind of compare when looking at these different types of products, is most recently I was actually looking at different Airbnb options for my sister's wedding.

I knew exactly what I wanted. I needed a two-bedroom place that was okay with pets and was in a specific location for the wedding.

Now, I put in those different features in Airbnb and came back with a ton of different options.

Luckily, the site allows you to look through each option, gives you a detailed breakdown of how each property is, the amenities that each one has.

I was able to choose a really strong property.

But with these different types of products, you don't always have a website that you can go to to really see these different features, the different benefits, and how these products work. So I want to talk about that.

And if you are looking at these products, make sure you do have someone to talk to that do know all these different breakdowns of these different types of annuities.

So today we're going to start with the different types of annuities, then we're going to break down the different annuity values, and finally, we're going to look at the different types of bonuses available as well inside those annuities.

Types of Annuities

Most likely, you're looking at two types of annuities already, either an accumulation annuity or an income annuity.

The way an accumulation annuity breaks down is, it's going to have higher caps than an income annuity.

Usually, anywhere between 3% - 5.5% sometimes. It could be a little bit higher depending on the product and the index.

They're going to be a little bit shorter term.

I prefer five to seven-year products, and the reason for that is because you put your money in for five years, let it accumulate. And after five years, you can see the position you're in, see how the market is, and maybe re-evaluate what you want to do.

Then when we go into the different types of income annuities, these are going to be a little bit more complex of a product, and they're also going to be a little bit longer duration.

When I say longer, I mean these are lifetime income products, so you could be in this product for the rest of your life.

You really want to understand how these break down or how it works.

As far as surrender charges go, they could be anywhere from 5 to 15, I've even seen a 16-year surrender charge on a product.

But you can turn on that income sometimes right away.

You just want to know how that breakdown works and a little bit about the product.

So hopefully that was a quick overview there.

Annuity Values

We'll go ahead and look at the different types of annuity values inside that income annuity because there usually are two different accounts.

Now that same product has two different accounts. It has an accumulation account and then it has an income account.

In this specific example, what we're going to look at is just a basic product that I made up here.

It's not any product in particular, but it's kind of a basic one, how most of them will work.

So, we're going to take $100,000 in premium and, in each account, we're going to have that first $100,000 here.

In the accumulation account, you'll start with $100,000. And in the income account, you'll actually start with $110,000 because this account has what is called an income bonus, which I'm going to break down for you in a minute here.

In this accumulation value, the way the interest is credited is, you usually have a floor and a cap.

In this sense, we have a 4% cap, 0% floor, and then we have that 1% fee as well. Now, our 1% fee is actually paying for this income account.

Now, the reason the income account cost money is because, if you'll notice, it has an 8% simple interest roll-up rate, and that's how the interest is credited in the account.

So, no matter how the market performs, your income account value is going to go up by 8% simple every single year.

In this case, it's going up $88,000 a year, no matter how the market performs.

Now, not only that, I want to show a three-year breakdown.

Say in this accumulation value, the index earned in the first year is 0%, it was a bad year. We're going to have the 1% fee, so the account's going to go down to $99,000.

The second year, we earn 4%. It was a decent year, capped out, we're up to $101,930. That's net 3% after the fee as well.

And then finally, we have a 2% year, so we go to $102,929, which is a net of 1% after that 1% fee.

Now in the income account, you'll notice, again, it's rolling up 8% every year. By year three, we have $136,400.

In this scenario, we're just going to take a quick look and say if we wanted to take money out, and we're not going to have any surrender charges in this example here.

You're going to have that full $102,929 available to you. However, in this income account, again, you have over $34,000 more than in this accumulation account, but the kicker and the catch is you don't have access to that full $136,000.

What you have access to is you can take a lifetime income of 5% every single year for the rest of your life even when that account runs to zero.

That's the benefit of using an income account versus the accumulation account.

Now that we've talked a little bit about the different types of annuities and we broke down the different values inside of an income annuity, let's go over here and look at the different bonus options in those annuities as well, and how they're going to affect each of those accounts.

Bonus Options

The premium bonus can affect either an accumulation or an income annuity, but it's always going to affect the accumulation value.

So, it's going to affect that cash value inside of the annuity that you have access to.

Now you're looking typically about 1% to 2% bonus, nothing huge. And if it's bigger than that, most likely there's a fee attached, so you really want to understand how that works and what that fee would be.

Sometimes you might get a 10% bonus but have a 1% fee every single year with a 10-year surrender.

So, you're going to have that 1% fee for 10 years, which equals that bonus that you just got.

Then we're going to look at an income-based bonus. The income-based bonus is probably your most common or your most typical bonus inside of an annuity that's going to be marketed to you.

Like in the example we looked at earlier, that was a 10% income-based bonus. So basically, you'll put in $100,000 in the premium and you'll get a $10,000 bonus starting year one without doing anything.

That's the benefit to that income-based bonus. Now, in the example, again, we use a 10% bonus, however, a lot of products right now are anywhere between 15% and 25% on that income bonus.

But again, it's towards that income account to allow you to take that lifetime income withdrawal from.

Finally, we're going to go ahead and look at the interest crediting bonus.

In the interest crediting bonus, how that works is it's going to apply to the income account only. However, it is a little bit more complicated.

The reason it's a little bit more complicated is because it could be credited from the accumulation account or the income account.

An example of that would be, there's two different products that do it those two different ways. In one of the products, it has what's called a 15% interest crediting bonus.

Not every income annuity has a roll-up rate. Some of them go off of the interest earned in the accumulation account.

What that means is, say you earn 4% in the accumulation account. You have an index option of 0% to 4%, you cap out and earn 4%.

Well, you're going to need a 15% interest crediting bonus on that. So, you're going to earn actually 6% in the income account. You'll earn 4% in the accumulation account in that example and 6% in the income account.

That's where that bonus steps in. You get that extra 2% there.

The other type is usually called an income roll-up or index roll-up rate. One carrier might say you get a 150% roll-up.

What that means is, based off of the accumulation value, say you earn 1%, you get $1000 credit there. Well, you'll multiply that 150%, which will be a $1500 credit to the income account.

So, you'll get $1000 in the accumulation account, however you'll get $1500 in the income account.

Now that's a little bit of the differences between the three bonuses.

Today, we went over the two different types of annuities, how the two different accounts work inside income annuities, and then finally we went over the three different types of bonuses.

Again, if you do know what you want, or you have your filters that you know you're looking for, just make sure the product that you're looking at and the person you're working with knows how those products work.

And if they don't, then feel free to fill out the form on this website, and you'll be able to ask any questions you have there as well.

I hope you enjoyed today, another edition of Money Script Monday. Have a great day.