Bonus Annuities - The Good, The Bad, The Ugly | 7 Figure Annuity Sales Podcast | Ep. 276

All right, welcome to the Seven Figure Annuity Sales Podcast. This is Caleb north again running solo. Chad is, is unfortunately not joining again this week. More of the same. It's, it's a busy time of the year and with a big major move coming up, they're, they're very covered up. But I do have some good content for us today nonetheless. So I want to talk about bonus annuities. This is something that.

I've seen a lot of agents get particularly enticed by, especially in this high rate environment, as these bonus rates have. I mean, they've gone up along with the fixed rates, the index rates, everything. And so I want to talk about the good, the bad and the ugly of these bonus annuities and really kind of peel back the curtain. When are they appropriate, when are they not? How do agents sometimes misrepresent them? How do they get used in sales? Maybe a way that should be avoided, those types of things. So the one thing that you have to bear in mind when we talk about any kind of product feature is that everything comes at a cost. There, there is no free lunch, and as they say, there's 100 pennies in every dollar. And there is not, there is not a way for an insurance company to give away the farm and there not be a cost for whatever they're giving. So with bonuses, there is no way that an insurance company can give an 8%, 10%, 12, 15, 20% bonus, whatever the case might be, without that coming at a cost somewhere else. And I would argue that if the cost to that bonus is not somewhere visible in the product, then it's probably coming operationally. And you would expect the processing, customer service, things like that to not be at par. You would expect those things to be pretty, pretty poor because again, there is a cost to everything. And so if that cost is not reflective in the product, then it's probably coming somewhere else. And that's not necessarily a good thing. So you might have a good bonus product. You might be able to have a bonus product that maintains some pretty good rates. You might have a bonus product that has a good bonus, maintains good rates, and has good benefits and other features in the product. But that is costing somewhere. And the question is where? And it's not always super clear to see. It's not always super identifiable. But we're going to talk about it. And before I jump into the good, the bad and the ugly of these bonus annuities, I want to talk about two different types of bonuses. For those of you that may be a little Bit newer to the industry. Don't get confused by income based bonuses, income account value bonuses, benefit based bonuses. There is a difference between a bonus that goes to the account value, the contract value of a policy and a bonus that goes to an income benefit. There are income riders on these products that often have gargantuously high bonuses. I've seen, I've seen 30 plus percent on some products before.

And sometimes those bonuses, even on the income products that are going to the income base or the income benefit, sometimes they get painted as quote unquote premium bonuses. And so it gets a little bit convoluted because you think, oh, I'm gaining this bonus on my premium in my account value. But that's actually not the way that it's working. If it's a benefit based bonus, if it's a bonus toward income, an income benefit that is going into whatever that insurance company calls it, but it's that separate account that is an actuarial number used to calculate the future income. It is not tangibly present in the account value. So when I'm talking about these bonus annuities, I'm not talking about income annuities or indexed annuities that have income riders that happen to have these large bonuses on them. I'm specifically referring to a straight indexed annuity that has an account value bonus, a contract value bonus. That's what we're looking at today. So I just want to paint that picture, get everybody on the same page. And if you've seen carriers promoting these gargantuously high bonuses and calling them premium bonuses, you can be sure they're not actually going to the account value. They are going to the income base, the benefit base, the income, account value, GLWB value.

Whatever they call it, LIBR value.

They. There seems to be no shortage of names that these insurance companies give these different accounts. Everybody calls it something different. But that said, that's where that's going. So we are talking about account value contract value bonuses. Typically these are going to be vested bonuses over the surrender period where each year a new percentage of that bonus percentage is being vested into the account value. So if you have a 10% bonus and it's vested over a 10 year surrender period, they're not actually going to have that full bonus be tangible to them in a walk away format until the 10th year. It might still be present there for crediting purposes, for death benefit purposes, for whatever indexing purposes, but it's not going to be there for necessarily surrender purposes because it hasn't been vested Entirely. And there are good rates and they have become more enticing. And I have seen agents be particularly intrigued by some of these bonus products. So we're going to look at the good that the bad and the ugly. I'll just start with the good. These bonuses, they give you an immediate shot in the arm. They generally are easier to sell because of the immediate gratification that it gives a client. It starts the account value at a higher place, which is advantageous for compounded growth in subsequent years. So there are benefits. And that goes without saying. I mean, if you've seen the these products, you can pretty well see that they're generally easier to sell. And we're going to get into the bad. The bad of the bonuses typically come with a reduction of index rates. So when I talk about every benefit has a cost because we're dealing with insurance, we're dealing with insurance products. These are not securities. These indexed annuities are an insurance product. So there is a cost to the insurance. And when there are these benefits, there are costs to the benefits. Well, the most typical cost to having a bonus product is that the index rates. So we're talking about their cap rates, their participation rates, their spreads. Those are generally going to be less valuable. In other words, their caps and their pars are going to be lower. And their spreads would be higher than a identical product that didn't have the bonus. So there is a portion of the budget for producing that product, the benefits of that product that is given to the bonus. And if there is portion of budget given to the bonus, then that has to come from somewhere else. And that typically, like I said, almost every scenario that's coming out of the index rates, the caps, the pars will be lower, the spreads will be higher, which means that consequently your crediting potential would be a little bit lower, would be reduced in those subsequent years. Think of it this way. If you have a product with a 10% bonus and you're able to get a 7% cap rate on the S&P 500. In contrast, you have another product that has no bonus, but they have a 12% cap rate.

That's not an unlikely scenario to see. Those are not unlikely rates to see in the current rate environment that we have. So you could get that 10% bonus up front and then your crediting potential in subsequent years is reduced as a result. And again, that's the majority of the time. I'm not saying that every single carrier that has a bonus product has lower rates than somebody else. I'm just simply Saying that most of the time where the cost for that bonus comes from is from the index rates that you're getting, the caps, the pars and the spreads. I will say too.

As part of the quote unquote, the bad is that sometimes agents who are not in in it for the client's best interest, you know, commission chasers, things like that, product pushers, they can be tempted to, to use bonus products to replace other products that might actually have more client benefit for what a client's needing. Now, the carriers try and do a good job of getting an idea for what the client's purpose of the money is and what the current product is versus what the new product is. How is the client netting a benefit in the replacement? So they try to do do that. Well, I will say that agents can word things and try and spin things in a way that somehow gets something through that might not actually be what's best for the client. So imagine a scenario where an agent is. It's just a hypothetical. An agent's working with a client and they've got an income product and they've got an income account value, they've got a guaranteed lifetime income and somehow the agent's able to spin it in a way that says, hey.

You know, you don't necessarily need the income, but what if we leverage this other product for accumulation where you could make your withdrawals, you take your RMDs, whatever, and have more crediting potential. Well, if they're able to somehow convince the client that that's what they need and the client somehow agrees, but that's not actually the case. They actually do need the guaranteed income. They might be able to get that product, that replacement pushed through by using the bonus to cover whatever surrender charges might be present on the income product. But it might not actually be what's most client advantaged. It might not actually be what's best for the client. But now the client is convinced that that's the case and so they sign off saying, yeah, this is, you know, I don't need this income. I like, you know, better growth potential, you know, whatever, however they word that on the actual replacement forms in the application to get that through. It's not a super common thing to see, thankfully, it's not a super common thing to see. But, but it can happen. It does happen. And it's one of those things just at for agents be, be wary of, be careful of, don't be replacing products with bonus annuities. Just because you might be able to get it through doesn't mean that's what's actually best for the client.

And then the ugly.

This is it is what it is. Again, it's cost issues. But sometimes bonus products will have lower commissions as a result of a greater cost to the carrier to have the bonus and generally an easier sale. So a lot of times insurance companies look at their bonus products and think we're making it easier for an agent to actually sell this thing. And we simultaneously have a little bit greater cost wrapped up into this product because of the bonus. So we're going to short the commissions a little bit, we're going to reduce the commissions. Again, not a huge issue. And if the client needs the bonus product, then you shouldn't be concerned about the commission anyways. If you're selling what's best for the client, that, that's paramount. That's first and foremost. So it's an ugly, not necessarily a bad, just because it's, you know, we obviously want to make what we can make. We want to make as much as we can make. But. But the first thing to consider is what's best for the client. So it's an ugly, not a bad, but just a reality of common bonus products tend to pay a little bit less in commission.

Sometimes bonuses can be misunderstood. Sometimes agents will misrepresent this. I alluded to this earlier, this idea that agents can promote the bonus and then promote the indexing as if they're getting both in equal parts to other products. In other words, sometimes agents will promote the bonus and the fact that, oh, look, we have the, you know, the S P500 and this is our cap or this is our participation or whatever. It's like, well, that other product has the same index, right? But they're not considering rates, they're not necessarily considering the other benefits, higher rates potentially of that other product for future crediting purposes. Maybe they're not considering fixed rates on that other product as well.

So it can be, it can be construed sometimes to clients as the base product itself is the same as the alternatives that they're looking at when they're not the same. And then the bonus is just like the cherry on top. Look, you're getting this extra and it's not, it's not extra. The bonus is never extra. They're never going to get the same value in the base product base policy as they could in an alternative that doesn't have a bonus. All other things the same. So if you're adding that bonus, again, it comes down to a cost issue. You use a bonus product, there is going to be an inherent cost to that added benefit. So it isn't extra, it isn't the cherry on top of it's being impacted somewhere else in the policy, in the product itself. So it can be misunderstood, it can be misconstrued, and it can often be incorrectly marketed.

It's not uncommon to see bonus products be incorrectly marketed. An example I guess would be going back to the income products that have these sometimes really high income account value or benefit based bonuses that are not account value bonuses. And, and agents sometimes will paint that as, look, your account's growing by X percentage. It's like that's not the actual account value that's growing by that, that's the income base that's growing by that. It does have tangible impact in the future income. But it's being incorrectly marketed, it's being misconstrued, being promoted in a way that it doesn't function. Whether that be intentionally or, or accidentally, it doesn't really matter. The impact that it has on the client is the same. So you want to make sure that you understand the way the bonus product works and that you're not marketing it to clients incorrectly. And IMO's too. I mean, you're an IMO rep and we have them that listen to the podcast, like make sure you understand the product and make sure that you're marketing that product to your agents properly, correctly. So that's a big deal. Now I do want to talk about use cases. I want to talk about when do these bonus products fit, when do they work? Well, because it might seem like Caleb's down on bonus products and I truly am not. I just think that sometimes agents see the bonuses and they think that because there's a bonus, it's inherently the best thing. And that's not the single standard by which best, quote, unquote, best product should be selected. There are tons of other criteria to examine and look at to determine what's actually best for a client situation. So I'm not down on bonus products. I just think that sometimes they get overhyped and overused in scenarios where it's not necessarily the best thing for the client. But there are instances where it is the best scenario for a client. If you need to replace a another policy that is in surrender, you need to make that client whole immediately. Most carriers are not going to issue a replacement policy. In other words, you're replacing existing policy with a new one. Most carriers will not do that unless the client is being made whole right away. Well, realistically, the Only way to do that is via a bonus. So if you've got a 5% surrender charge and you've got a 10% bonus, you're making the client whole plus some right away. But simply making the client whole does not justify the replacement. There has to be something else, something greater that advantages to the client than what they're currently in. So typically for replacements to work well, you need either substantially better rates. If the purpose of the money is just accumulation, protection and growth and the current product has low rates and you're trying to replace it with a product that has better rates, a bonus is probably going to be necessary. Well, it will be necessary if it's a.

If it's a replacement during the surrender period. But you're going to need to see some other advantage to the client. So again, higher rates in the new product, if the purpose of the money changes, you're going to find it easier to replace products going from somebody that has just an accumulation policy designed for protection and growth. Replacing it with an income product because the need is the income that's a whole lot easier to replace. Especially if that income product has that bonus than it is going from. They have an income product that has some kind of income benefit income guarantee. Replacing it with something that's designed just for accumulation, that's a tougher one to get through. But regardless of the scenario, the bonus needs to make them whole and better right away. There needs to be something else in the new policy that is in greater alignment with the client's needs and desires. And if there's not that, then just the replacement would be considered relatively frivolous. Going from something that's five years into surrender to something that is going to be brand new, surrender and has a bonus. And let's say rates are approximately similar and, and there's no extra benefit that's probably not going to go through even though the bonus is there because it's a frivolous replacement and you're extending the surrender period the carriers don't want. Well, I say they don't want.

From a suitability perspective, they're not going to look at elongating surrender as something beneficial to a client because it's not. The longer that surrender period, the longer that those funds are considered not liquid, that's not client advantaged. So if you're moving laterally, there's no extra benefit. Just simply having that bonus does not make that current policy more replaceable. In fact, it's probably less replaceable because that's already further along in surrender. So Just things to consider. But to get back to the point, use cases when you're dealing with replacements. Bonuses are necessary. And then another one that's a little bit more unique but is pretty cool I think is immediate recoup on taxes. So if somebody were to Roth convert or something like that, where they're paying the taxes and you can get a really nice bonus, you can recoup effectively portion of what would have been paid taxes. So that's kind of a neat little. Neat little. It's not a hack, it's just the way the products work. But a cool thing that you can, you can incorporate where you can guarantee it immediately. Now let's say there's a 12% bonus and they paid, you know, 24% whatever to convert. Well, you can get, get back. And I'm using air quotes on that half of what was paid in taxes to convert. And now your policy's Roth and it's growing tax free. So even though your rates might be a little bit lower on your index strategies, simply getting back what you paid in taxes or a portion of it at least, it can be pretty client advantaged. And now you're able to grow that tax free. So that's, that's one other scenario that I've seen agents use before. I think it's pretty unique and cool. But take that as you will. That is bonus annuities. The good, the bad and the ugly. Again, use them when they're appropriate. They are appropriate in certain cases. But don't assume that just because there's a bonus on a product that somehow that product is now the best product or for a client or everybody. I think a lot of times agents have the mentality that they create these hard and fast rules. Oh, I would, I would never sell a product that didn't have a bonus. Well, what if that was actually needed? Or I would never sell a 10 year annuity. What if a 10 year annuity was needed? Anyways, don't set those hard and fast rules on what you will and won't do. Take each client as a unique scenario and figure out what's best for them in their situation, for their goals and ultimately their needs. So bonus annuities, the good, the bad and the ugly. Hope that helps you out. Reach out to us if you need anything. But as always, happy selling.

Bam.