Understanding Variable Annuity Bonus Credits

Purchasing a variable annuity can provide you with many benefits in your retirement planning. One of the features that is commonly offered with variable annuities is bonus credits. Here are the basics of bonus credits with variable annuities and how they work.

Variable Annuity

A variable annuity is a contract between you and an insurance company. You are going to provide payment to the insurance company and they are going to allow you to invest part of this money into securities.  When you reach the age of retirement, you will be able to receive a regular paycheck from the insurance provider. The size of your paycheck is going to depend on how your investments in the annuity perform.

Bonus Credits

As an incentive to invest in a variable annuity, many insurance providers are now offering bonus credits to investors. Bonus credits are an amount of money that is credited to your account when you invest. For example, your variable annuity company might provide you with a bonus of 2 percent of each payment that you make for the annuity. If you give them $10,000 for the purchase of an annuity, they are going to credit $200 to your account. In some cases, the bonus credit can be a nice incentive for you to invest more of your money into a variable annuity.

Advantages

The major advantage of bonus credits is that you are essentially receiving free money. They are crediting money to your account based upon how much money you give them for the annuity.

When you get extra money credited to your annuity account, this means that you are going to have more money available to invest. With more money to put into the financial markets, you can amplify the amount of money that you are able to earn for your retirement. Over the course of many years, these bonus credits could substantially help your retirement chances.

Disadvantages

Although these bonus credits can be attractive, there are a few potential disadvantages that you will need to be aware of. One of the most common drawbacks of this type of annuity is that it will have higher surrender charges attached to it. If you think that there is a chance that you could have to surrender your annuity before it matures, this could take a significant bite out of your retirement savings.

In addition to the surrender charges being higher, they might apply for longer than normal. For example, instead of having to worry about surrender charges for the first five years, you might have to worry about them for the first 15 years instead.

Another potential problem with variable annuities that offer bonus credits is that you may not be able to receive these credits for long. Many times, the insurance company is only going to offer bonus credits for payments that are made during the first year of your contract. After this, you will not be able to receive any more bonus credits.

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