Considering its interest rate potential, a multi-year guarantee annuity, or MYGA annuity, may seem pretty “boring.” This can happen especially when you compare it to a fixed index annuity and its growth potential.
But while many people see indexed annuities as appealing, not everyone does. Some retirement investors just want an unchanging, fixed growth rate for their money. The prospect of changing interest rates, from time to time, doesn’t appeal to them.
If you desire straightforward choices like this, a MYGA annuity might be of interest. Unlike with a fixed index annuity, a MYGA annuity gives you a fixed interest rate over time. In many cases, this interest rate doesn’t change in later contract years, like you often get in a traditional fixed annuity.
As you think over different types of annuities, it’s important to understand your options. Here’s a quick guide to understanding MYGA annuities, their benefits, and potential drawbacks in retirement planning.
Breaking Down the MYGA Annuity
A multi-year guarantee annuity is also known as a “fixed rate annuity.” Most MYGAs are “single-premium contracts,” which means they are paid for with an initial lump-sum premium payment. The contract lasts for a certain timespan, which is called the contract term. Generally, the terms on MYGA annuities last for 3-10 years.
With the annuity, a fixed interest rate is declared in advance. In most cases, this interest rate remains the same throughout the contract term. The insurance company provides a guarantee for this growth, and it credits interest to the MYGA annuity on an annual basis. In turn, the money grows tax-deferred within the contract.
So, the future growth you calculate for your annuity will also be guaranteed. If you bought your MYGA with non-qualified money – or money outside of a retirement account – the earned interest will also grow tax-deferred.
Pros of a MYGA Annuity
With its guaranteed interest rate, the MYGA annuity is great for giving you “growth certainty.” In other words, you will know exactly what your interest rate and the value of your contract will be, backed by the insurance company’s guarantee.
Some other potential advantages include:
- A multi-year guarantee annuity comes with no internal fees, unlike some other fixed-type annuities
- It can provide guaranteed income, whether for a set period or life
- You may take withdrawals, which can be your earned interest or up to 10% of the contract value
- A multi-year guarantee annuity can leave a death benefit to your beneficiaries
- A MYGA annuity functions like a CD but it offers tax-deferred growth — interest on a bank CD is taxable
- Your principal is protected, and interest is compounding
- Generally, MYGA annuities pay out a higher interest rate than CDs do
It’s also important to highlight that many MYGA contracts come with waivers for a terminal illness or nursing home care. These waivers carry special withdrawal provisions, where someone can take money out of the contract without surrender penalty. Many waiver provisions allow withdrawals at no cost. Of course, certain conditions must be met.
For the terminal illness waver, many annuities allow you to withdraw all of your money. Among other conditions, someone must have been diagnosed by a qualifying medical professional. When the waiver becomes available can vary from contract to contract. Some annuities specify after the first year while others may allow partial withdrawals the first year in. It’s important to check the certificate of disclosure and discuss all details with your financial professional.
Just like with the terminal illness waiver, a nursing home care waiver gives special withdrawal privileges. You may take all of your money without a surrender penalty or at no cost. Certain conditions must be met, including notice from a qualifying medical professional and the person having to be confined to a nursing home facility for a minimum amount of days.
Many contracts state 60 days while others call for a longer period. In many annuities, confinement must have started 3 years or longer into the term for a penalty-free full withdrawal to be available.
Some MYGA annuities may come with waivers for other emergency situations, such as home healthcare needs. Check with your financial professional about the specific provisions of any contracts you are thinking over.
Cons of a MYGA Annuity
Sure, a MYGA annuity can offer a number of benefits, but it also comes with drawbacks. This type of fixed contract isn’t for everyone. As you research your options, you may want to consider these potential disadvantages:
- This annuity is a long-term instrument, meaning it’s better for those who can commit to a longer timespan
- For people who will need their money within 3 years, this won’t be a good fit
- If the contract is close to ending and you don’t tell the insurer your intentions, the contract may renew
- While a MYGA does offer some liquidity, it is more limited than other products give
- Like other annuities, a MYGA annuity comes with surrender charges
- In some MYGAs, the death benefit amount will be the contract surrender value — not the accumulation value
- Some MYGA annuities may offer better interest rates, but their benefits won’t be as strong in other contract parts
- Withdrawals before age 59.5 are subject to a 10% penalty and income taxes
Another important point. As you consider your options for a multi-year guarantee annuity, you may find that higher-rated insurance companies don’t always offer the best interest rates. At times, carriers with middle-range financial strength or slightly higher may provide higher rates. You may want to keep this in mind as you shop around.
MYGA Annuity can Come with Higher Interest Rates
Annuity products can have many variations – even annuities of the same type. Multi-year guarantee annuities are no exception.
Some MYGA annuities come with an option for earning more interest. To illustrate, let’s say you are looking at a MYGA annuity. The insurance company says if you put less than $200,000 of premium into the contract, it will give you a fixed interest rate of 2.25% per year.
But suppose that you elected to put in more than $200,000 of premium. In that case, the insurance company would give you a higher fixed rate of 2.5% per year. This is an example of how someone can get a higher fixed interest rate with a MYGA annuity.
Understanding Your Options with a MYGA Annuity
Overall, your financial plan — potentially investments, fixed-income instruments, potentially annuities, and all — should make sense for your needs, goals, and situation.
Generally speaking, a MYGA annuity is a long-term play. If you are looking for safe, predictable long-term growth for your money, a MYGA annuity may be of interest. However, should you have short-term liquidity requirements or possibly need your money for another goal, a MYGA annuity may not be right for you.
If you believe a MYGA annuity can help you achieve your goals, be sure to read the fine print. It’s important that you understand what you may buy. Know the benefits and features of your contract, your potential surrender charges, and possible tax implications if you do make withdrawals. A financial professional can help you become familiar with these details and make informed decisions.
Should you be ready for personal guidance with finding a high-quality MYGA annuity, financial professionals can help you at SafeMoney.com. Use our “Find a Financial Professional” section to connect with someone directly. If you need a personal referral, call us at 877.476.9723.