Definition
A premium bonus is an amount credited by the carrier to a deferred annuity contract at issue or on additional premium contributions, expressed as a percentage of the premium and added to the accumulation value, funded structurally through some combination of declared-rate adjustment, surrender-charge schedule extension, and embedded spread.
Why it matters
A premium bonus increases the accumulation value at issue above the premium paid, which makes the contract's headline starting value higher than the premium. Identifying what funds the bonus — the structural source of the additional credit — is what makes the bonus legible alongside the contract's other features rather than as a standalone benefit.
How it works
A premium bonus is credited at issue, typically as a percentage of premium ranging from 1% to 10% or more depending on product design. The bonus is added to the accumulation value, increasing the starting balance from which the contract operates. Structurally, the bonus is funded through some combination of three mechanisms: a lower declared rate or lower crediting parameters than would otherwise apply (the contract earns less per year than a non-bonus version of an otherwise comparable product); a longer or steeper surrender charge schedule (the contract is more constrained during the surrender period than a non-bonus version); or a higher embedded spread on the underlying general account assets (the carrier retains more margin to fund the bonus). Some bonus contracts include a vesting schedule under which the bonus is forfeited in whole or in part on surrender during a defined period, separately from the surrender charge schedule; the vesting schedule is specified in the contract. Some contracts apply the bonus only to the initial premium; others apply a smaller bonus to additional premium contributions during a defined period.
In practice
For an individual considering a deferred annuity with a premium bonus, the practical analytical question is what funds the bonus and over what period the funding mechanism operates. Reading the contract identifies the bonus percentage, the vesting schedule (if any), and the surrender charge schedule applied to bonus contracts; comparison to non-bonus versions of comparable contracts identifies the implicit cost. A professional should be able to characterize the bonus's funding structure for the specific contract being evaluated and produce a comparison against an otherwise similar non-bonus contract. Plan fiduciaries evaluating in-plan annuity options with premium bonuses should require carriers to disclose the structural funding of the bonus and to allow comparison against non-bonus alternatives.
In the Longevity Standard Framework
Premium bonus is supporting vocabulary in the Longevity Standard framework — it is a structural feature that adjusts the accumulation value at issue while the cost structure of the contract retains whatever value it would otherwise carry (typically embedded spread for general account products, crediting parameter drag for fixed indexed annuities). The bonus does not change the contract's cost-structure value as a categorical matter; it shifts the timing of when cost-structure effects are felt, with the bonus credited at issue and the funding mechanism operating over the contract life through some combination of lower declared rates or crediting parameters, extended surrender charge schedules, and higher embedded spreads. In the realized value calculation, the bonus and its funding mechanism net out over the contract life — the cost-of-income comparison evaluates the contract's actual delivery against the frictionless benchmark, regardless of how the contract front-loads or spreads its credited amounts.
Related terms
- Accumulation value
- Surrender charge
- Surrender period
- Crediting rate
- Crediting parameter drag
- Embedded spread
- Cost structure