To know if bonus annuity is a good option for you, you have to understand what it actually means and what are the risks involved in it. Very simply put, a bonus annuity is a contract that gives a bonus on your invested amount. The bonus is provided by the insurance company when the investor deposits his money.
Usually the bonus offered by the insurance company ranges from 3% to 5% that is added to every premium payment that you make on your investment. This means a growing balance amount that keeps adding to your investment.
But you might wonder why an insurance company would do something like that. Well, the point to be noted here is that in return for this bonus addition to your funds, the insurance company will probably ask for a longer surrender period. The usual surrender period for annuities is 7 where as in bonus annuity, the surrender period can range from 8 to 9 years. Also, every bonus payment that is made subsequently will also have its own surrender period of 8 to 9 years.
Most insurance company provides allowances for withdrawal of a part of the premium payments without earning any penalty. In fact, you can usually withdraw around 10 to 15% of the payments. But it is to be remembered that any withdrawal from annuity funds is taxable and if the funds are withdrawn before 591\2 years of the investor, a federal penalty of 10% is chargeable on the amount.