Transcription
Bonuses in our products are not what they seem to be.
What's up, everybody? It's Caleb North here with the 7igure Annuity Sales Podcast, and I'm rolling solo today. Um, Chad couldn't join us for today's recording. He's got his brother in town. They're spending some time together with the families, which is awesome. Um, but I'm going to be talking today about something that's come up relatively frequently this past week, in working with agents on case design, and it's bonuses. And, you know, bonuses is one of those things that they have their place, but it is most certainly not with everybody. And I think that sometimes, you know, agents can approach the product recommendation, the sales side of things with their clients and try and fit everybody into one solution. And the reality is it's not, it's not going to be a one-size-fits-all. Um, the different types of products that we have do different things. And, you know, I started this episode out by saying bonuses and our products are not what they seem. And it's true. Uh, I really, you know, in all honesty, guys, I don't like, I don't like the term bonus to describe what a bonus is. Um, we use the term, we understand what the term is in our business, but I really don't think that that is the best, most descriptive term of what's actually happening in that policy that has a bonus. And I'll explain why.
When we think of a bonus, we think of extra. We think of additional. We think it's, it's on top of everything else. Bonus by definition doesn't detract from anything else; it adds to everything else. But the function of bonuses in our products doesn't align with that definition at all. In fact, I heard an agent one time, and I think this is the best definition for it. He referred to a bonus as an advance on interest. And when you look at the math and you look at the numbers, that really is the best, most descriptive way to define what bonuses are. Um, and so I want to kind of keep that lens and then kind of talk about bonuses and the way that they function and why I think, number one, you need to use them sparingly. Um, and number two, those rare instances where they do have a place.
And so, first of all, you've got to understand that there are two different types of bonuses. Um, you have an account value bonus, premium bonus, whatever you want to call it, that actually credits to the account value, the accumulation value of the policy. Now, most of the time that bonus is going to be under the, you know, 25% threshold, with most being between, you know, 10 and 20% right now in the rate environment that we have in June of 2025. Um, you know, we look three years down the road, our rate environment is different; our bonus percentages might look different, but right now that's, that's what we're typically seeing. So, what is the other type of bonus? Well, it's, it's an income benefit base bonus, income account value bonus. Um, and it's really designed just as an actuarial number to help calculate income. It doesn't credit to the account value. Um, it's not a tangible bonus in the sense that over time the client actually gets that credited to their policy value that they could walk away with; it's used purely for income purposes, and that's where you see sometimes, you know, they're 5, 10, 15%. But if you see a policy or product that's got a, you know, a 30, 35, 40% bonus in air quotes, it's almost always a benefit-based bonus toward future income.
So, the first thing I would encourage you as you're looking at products that have bonuses is, number one, identify what type of bonus it actually is. Is it a premium bonus that actually credits to the account value? Um, if it is, you need to check what's the vesting schedule because most of the time that bonus is credited to the account value for interest purposes, but it's not actually vested in that policy, in that account value for until the end of the surrender period. That's a pretty typical approach. So take for example, you have $100,000. You credit a 10% bonus for accumulation purposes, interest crediting purposes. They typically look at it as 110,000. So that then next year if you credit 4% interest, it's 4% on 110, not just 4% on a 100,000. Um, but you couldn't just walk away with 110,000; that bonus gets vested each year over time, and then obviously, like I said, you need to assess is it that premium bonus, that account value bonus, or is it an income bonus for future income benefit base income account value? And here's the thing, guys: carriers use different language, different words to describe the same thing, and you've got to be able to filter through the language; you have to be able to identify—like there's a carrier out there that calls their income value bonus a premium bonus. Nobody else calls it that because that bonus does not actually go to the account value, but they call it that. You have to be able to identify where is it being credited, where is it going, and then by way of the actual function of the product, then be able to identify what type of bonus it is.
Now, here's the problem. And I'm going to focus primarily on the, the premium bonuses, the account value bonuses, accumulation value bonuses, whatever you want to call it, right? The one that actually credits to the tangible, cold hard cash account of the policy. I'm going to focus on those types of bonuses today. And again, the best way to think about it is not as a bonus because it is not extra; it, you don't have a a straight, you know, plain jane indexed annuity with really good index rates and then boom, you tack on a quote-unquote bonus. It is merely an advance of interest.
Now, one thing that is a redeeming quality of bonuses is the fact that they are guarantees; you do get the bonus. Um, assuming you're staying with in the policy for the fullness of the time needed for it to vest. It is a, it is a guaranteed portion of the policy. Whereas index strategies, you get your rates, and you might have that rate guaranteed for a year or two or however long that, that point-to-point is, but you don't have any guarantees on what the index actually does. So, the single redeeming quality in my opinion about bonuses practically is that they are a part of the guarantee package, but they cost something. Um, it goes back to the old adage that there's only a hundred pennies in every dollar. If they're giving you two pennies somewhere, they're taking it from somewhere else. You don't, you don't get to price a dollar and then tack on an extra 15 cents in bonus and the rest of it be the same. So, where are they coming from? Where, where does the, the ability for the carrier to give a a bonus come from? It almost always comes from the index rates. Now, there are exceptions to that, but 90 times out of 100, 95 out of 100, they're coming out of the index rates. And so what that means is that let's say you have uh one indexed annuity that has no bonus. In today's rate environment, you can go get a 10% cap pretty much all day long on a solid policy, a great product, um, without a bonus. You add the bonus, let's say just for ease of math, it's a 15% bonus. You add the 15% bonus, and now all of a sudden you're looking at a four to 5% cap as a, as a first-year cap rate. Well, the alternative is no bonus and a 10% cap or 15% bonus and let's just ease of math call it a 5% cap. That is the cost of obtaining the advance on interest. So again, if it were truly a bonus by definition, we would still have a 10% cap and then we'd get the 15% up front. We don't get that; it costs something. We are paying for that interest to be advanced to the policy.
Now, can you make logical arguments to have interest advanced to a policy? Absolutely. But what are the long-term implications of it? Well, if we run with that example of on one hand, you could have a 10% cap. On the other, you get a 15% bonus and a 5% cap. Realistically, what needs to happen for the nonbonus product to over time be better than the bonus product from an end result scenario? Well, effectively three years of hitting the 10% cap. If you think about 10% minus five is five, and five or 15 divided by five is three. So three years of hitting the 10% cap. And now what we've done is we've credited an approximately equal amount of interest. Three out of let's call it a 10-year surrender period should not be too hard to accomplish. Uh, when you look at recent history of the S&P 500 looking, you know, January 1 to December 31 of any given year, we can take 10-year blocks going back like eight years. So, if we, if we were to take a 10, a 10-year block starting in 2024 and going back to 2014 and we go to 2023 and we go to 2013, you take your 10-year blocks and you gradually move it down the scale. For like eight years in a row, we've had seven out of 10 years be extremely positive in the S&P 500 and three out of 10 be negative. Now, that doesn't mean that that's going to happen over every 10-year period. That just happens to be the trend that's occurred over the last decade or so. About 70% of the years were positive in the S&P 500 and 30% were negative. In our indexed annuities, we're going to take a zero. We're going to take a a just a flat. Well, then you bring into question, okay, if that were to continue, how can I reasonably deduct that if a 10% cap were to hold relatively stable, it's not going to hold perfectly. Um, but if it were to hold relatively stable where we're coming out of that 10-year period with a, you know, a seven or eight percent cap versus a 5% cap that probably sees the same draw down in rate over that same time period, can we end up with more interest credited by way of the index strategy than we could using the bonus product? And I would make the argument that in most instances over the long period of time, 10 plus years, you would end up money ahead with higher index rates than you would with a bonus and a lower cap.
That's why I don't like the term bonus because it's not extra; it's coming from somewhere. And I can't remember the agent's name that, that said—I saw it in a LinkedIn comment one time—it's like a bonus isn't really a bonus; it's an advance on interest because it costs you future interest. That's a phenomenal definition of it. So with that in mind, we can reasonably determine that for most people, they're not going to go with a bonus product. If the client hears the term bonus and then perceives the way the bonus functions the same way, and they're not wrong to determine that, oh, a bonus is extra because that's by definition what a bonus means. It's our job to help them understand the way that it actually functions. And if they're on a mission to have downside protection with upside potential, while the bonus is a guarantee of the policy over time, it is unlikely that that would actually credit more interest over the long period of time than having higher rates through the entirety of that surrender period.
Where do then bonuses actually fit? Where, where do we—it it's almost always going to be on the basis of replacements. When we've got to replace a policy because the function of the policy is not doing what the client needs. Um, we're dealing with surrender charges. A lot of times we're dealing with market value adjustment on top of that. And a lot of times that means we're going to need a bonus to actually replace the policy; um, that really is, is one of the very few. I've seen agents try to leverage a bonus as kind of this selling point with Roth conversions of, hey, go ahead and convert your accounts to Roth, and you get a 15% bonus, let's say, now you're crediting back half the tax bill you paid, or you know, 60, 70% of the tax bill you paid. The problem isn't that that isn't true; that is a a true approach. It just goes back to what we were talking about earlier about the net end result. So if you use the bonus product, yes, you might recoup what you paid in taxes in a massive, in a massive chunk right away, but again, now you've got a Roth account that's growing tax-free. And if you end up with less dollars at the end, what does that really matter? At the, the goal is the end result. So again, the whole idea of using a bonus to offset the tax liability and a Roth conversion, it doesn't necessarily hold true based on what we were just talking about a minute ago of the end result of interest crediting um by having higher rates.
So, I really look at bonuses as kind of a a single-use case scenario. I think you could make an argument that there's some other ones, but it really is in the, in the form of replacements. And guys, here's the deal, too. Hopefully, policies aren't being replaced very much. Like, I see agents try to replace policies sometimes, and I'm like, guys, there's no sense in replacing this; it's doing XYZ. They're this far through the surrender period. It's a lot of times just because there's a policy out there and you've got a client that understands annuities and likes annuities, it doesn't mean that that means you should go chasing a replacement. So only do a replacement. Use a bonus if you have to in the replacement if what you're putting them in is the absolute best necessary thing for that individual. Um, don't use a bonus to replace a product just to obtain a sale.
So, that's kind of my, my two cents on bonuses. Bad word to describe what they actually do. They're really more of an advance on interest. They often don't lead to the end result of a a policy value being the highest that it could be if you had good rates and good index strategies with a carrier that has good renewal rate integrity. Um, so yeah, I, I hope that this gets your wheels, kind of makes your wheels start turning in your mind about how you've used bonuses in the past and where you might be able to use bonuses in the future. And might be a deal, too, where you're like, "Oh, dang. Maybe I should, you know, pump the brakes on the bonuses that I'm, that I'm using in, in the products that I'm selling." So, as I, I really hope that this helps you. Um, I can tell you that if Chad were here, he would echo the same sentiment that I'm sharing with you guys today. Um, so yeah, hope you guys have an awesome week and reach out to us if there's anything we can do to help you. Happy selling. [Music]