• Retirement and Annuity Advisor Jennifer Lang

More Growth Potential Than CDs | How Do Multi-Year Guarantee Annuities Work?

Updated: Feb 24

For retirement savers wanting more growth potential than what CDs and other fixed-interest assets might offer, fixed index annuities can be an attractive option. Indexed annuities can earn more interest over time than what these other options might.

Even so, some people would rather know that they are earning a guaranteed rate of interest. They are more comfortable with a minimum interest rate for their money’s growth.

Multi-year guaranteed annuities, or MYGA annuities, can fill this role for those who want a guaranteed interest rate with full protection of principal.

Multi-guarantee annuities are backed by the same dollar-for-dollar reserve requirements that apply to fixed and indexed annuities.

That means that for every dollar of MYGA premium that is issued, the insurance company must keep at least one dollar in its cash reserves to cover the outstanding amount.

How Multi-Year Guarantee Annuities Work

MYGAs usually have terms that last anywhere from 3 to 10 years. Many of them pay a higher "teaser" rate during the first year of the contract, then a lower annual rate thereafter.

Most of the contracts that do this will quote an effective rate that incorporates both the higher teaser rate with the rate paid for the duration of the term.

MYGAs are also like all other types of annuities in that they grow tax-deferred, with a 10% early withdrawal penalty for distributions taken before age 59.5.

Drawbacks of Multi-Year Guarantee Annuities

Of course, owners of MYGAs will forfeit some of the standard features that other types of fixed and indexed annuities offer.

Many other annuity contracts allow contract owners to withdraw 10% of their principal each year, which in annuity land are called “free withdrawals.” Multi-year guarantee annuities usually only allow owners to withdraw 5% per year (some MYGAs do go as high as 10%, though).

Other MYGA contracts permit withdrawals of only the interest earned or even nothing at all. This smaller amount of annuity liquidity is one trade-off for your money growing at a compounding guaranteed rate each year.

That may not be the only disadvantage. Withdrawing money from the accumulation value in a MYGA can lower the overall amount of interest that you are paid. Or in some contracts, it might reduce some other benefit that you are getting in the contract.

Know How Much Financial Liquidity You Will Need

This is one of the reasons why it’s important to understand how much liquidity you will need for your retirement. Whether it’s for an emergency fund or simply having a source of easy-to-access cash, that pot of money can certainly help out in a pinch.

You will want to know how much you may need to withdraw from the contract each year before purchasing a MYGA.

Other Options for the More Aggressive-Growth-Minded

Furthermore, MYGAs don't always pay the best rates out there. If you are growth-focused, you might find that while their growth potential isn’t guaranteed, indexed or variable annuities might be a better fit for your goals.

Both of these annuity types also tend to have fixed-interest buckets, along with other non-guaranteed options for growing your money.

So, be sure to thoroughly investigate all of the benefits, options, and features of your MYGA before you purchase it. While these instruments provide many benefits, they also have many moving parts, with several options to choose from in regards to earning interest.

How Can Insurance Company Ratings Affect MYGA Rates?

If you are looking for the best possible interest rates on your MYGA, consider purchasing a contract from a B or B++ rated carrier.

Chances are that the insurance company's rating will improve over time. And as a lower-rated company, the carrier will have to make up for the higher risk they carry by offering higher interest rates on their guaranteed products.

This effectively allows you to earn a superior rate of interest while waiting for the insurance carrier's ratings to improve. In fact, many of the top MYGA carriers are currently rated either B or B++.

To find the best ‘bang for your buck,’ consider requesting multi-year guarantee annuity quotes from at least three insurance companies. That way you can compare the rates, see which carrier might offer the best deal, and have some information on what the wider annuity market might be paying.

Multi-Year Guarantee Annuities and LTC Considerations

If you buy a MYGA that has liquidity options for long-term care or disability, try to coordinate your benefit payout with any other type of insurance coverage that you have.

Doing this will help you receive the best possible coverage. Y