You’ve probably seen the invitation before. A complimentary steak dinner. A presentation about retirement income, market volatility, and protecting what you’ve spent decades accumulating.
Then comes the offer.
Move your money into a new annuity, and the insurance company will add a 7% bonus.
On $500,000, that’s an extra $35,000. It sounds pretty compelling. And while the dinner may actually be free, the bonus usually isn’t.
The Appeal of an Instant $35,000
Suppose you already own an annuity worth $500,000. You purchased it years ago, its surrender period has ended, and you can now access or move the money without a contractual surrender penalty. Then you are offered a replacement annuity with a 7% bonus.
Your $500,000 appears to become: $500,000 + $35,000 = $535,000
Why wouldn’t you take the extra money?
Because the better question is not simply what you are receiving. It is what you are agreeing to in exchange.
A new annuity may restart a surrender period lasting many years. And during the early years of that contract, the surrender charge can actually be greater than the bonus you received.
For example, imagine the new annuity offers a 7% bonus but begins with a 9% surrender charge.
You receive $35,000 upfront.
But if circumstances change shortly after the purchase and you need to exit the contract, a 9% surrender charge on your original $500,000 investment could amount to approximately:
$45,000.
You received a $35,000 bonus, but potentially created a $45,000 penalty that did not exist before.
Suddenly, the “free” $35,000 looks very different.
The Real Tradeoff Is Liquidity
The bonus is simply one part of the economics of the contract. Insurance companies are not handing out thousands of dollars for nothing. In exchange, you may be committing your money to the product for a significant period of time and accepting contractual limitations on when and how it can be withdrawn.
Before the exchange, you had:
$500,000 with no surrender period.
Afterward, you may have:
$535,000 on paper—but with years of new restrictions attached.
Those are not economically identical. And life has a habit of changing faster than a surrender schedule. A move, healthcare expense, long-term-care need, opportunity to help a child, or simply a change in your financial plan can suddenly make liquidity far more valuable than it seemed at the dinner table.
Who Else Benefits From the Transaction?
There is another consideration. Annuities can pay substantial compensation to the person selling them, particularly when a new contract is purchased.
Compensation creates another reason to look carefully at the tradeoff. After all, that steak dinner doesn’t pay for itself.
If the salesperson gets paid for putting you into a new contract while you restart years of surrender restrictions, the new annuity should offer meaningful planning benefits beyond an attractive upfront bonus.
There Is No Free Lunch
Annuities can be valuable tools. The right contract can provide guaranteed income, principal protection, or peace of mind that is difficult to replicate elsewhere.
But an annuity bonus should never be evaluated by asking only:
“How much am I getting?”
The more important question is:
“What am I giving up to get it?”
Before replacing an annuity you already own, compare the old and new contracts side by side—especially the surrender schedules, guarantees, income features, fees, liquidity provisions, and benefits you may lose.
Sometimes the new annuity really is better.
Just make sure the bonus isn’t the reason you believe it is.
Start With the Problem, Not the Product
At Hanover, we do not begin with the assumption that an annuity is good or bad.
We begin with the problem that needs to be solved.
Maybe that means creating reliable retirement income. Maybe it means reducing investment risk, preserving liquidity, managing taxes, or providing more certainty around future spending.
An annuity may be one of the tools that helps accomplish that. In other cases, a different strategy may make more sense.
The important thing is that the product should follow the planning, not the other way around.
If you already own an annuity or have been recommended one, we can help evaluate how it fits into the rest of your financial plan, including the guarantees, surrender provisions, fees, liquidity, and alternatives available to you.
Because the goal is not to find the best annuity.
It is to find the best solution for you.