Retirement Planning

"To bonus" or "not to bonus" that is the question?

To answer this question first you have to understand how the FIA are designed. The first step in building a product is figuring out what the bond market can get you in a yield. Once you have a benchmark you can go in and actuarially go in and start tying the product together. If you put a bonus on a product the term, surrender charges, and commission come into play. The higher the bonus the longer the term or lower the commission. If ABC Insurance company puts a 10% premium bonus on a product with a 8% commission then the company has to calculate if the client passes away or surrenders the contract how is the company going to get their front end money back. That is where the surrender charges come into play. With the 10% bonus and 8% commission the surrender charges are going to be over 20%. With a no bonus product the surrender charges will decrease because the company does not have to recoup the bonus only the commission. Now onto the meat. If ABC insurance company gives the client a 10% premium bonus and pays the agent a 8% commission, they have to spread that out over the term. Let’s say this is a 14 year product. That would mean that 1.29% of the bond yield is taken up in bonus and commission. Then the company has to cover the minimum guarantee. In this example let’s say it is 2.00%. So if you are keeping track we have used up 3.27% of our bond yield. The last part of the process is to find the price of certain options. This is the biggest part of the process. If you have low caps then a FIA does not work that well. If you have high caps then the product tends to work a lot better. An example would be if the market went up two out of three years and you have a cap of 5% with a bonus. Your ave return would be 3.33%, on the other side if you have a no bonus product with a 10% cap it would return an ave of 6.67%. That is an increase of 100%. If you take the 10% bonus and 10 yrs worth of 3.33% your total return would be 43.33%. If you take the high cap product and 6.67% for 10 yrs you get 66.70% over the term. If you ask me I would say you would have a lot happier client with no bonus. Dustin J Weaver ACS PCS AAPA Marketing Director Capital Care America

Published Tuesday, January 19, 2010 8:57 AM by Dustin Weaver