More Growth Potential Than CDs | How Do Multi-Year Guarantee Annuities Work?
Updated: Feb 24, 2021
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. You will need to know how much money you can spare for healthcare costs and the type of disability or long-term care insurance that you have.
If it is an indemnity policy, then you can send your bills directly to your insurer. But if you have a reimbursement policy, then you will have to pay the bills out-of-pocket and then submit the receipts to your insurer.
This is where the liquidity rider in your MYGA comes into play. You may be able to draw the needed monies from your annuity instead of paying out-of-pocket.
Multi-Year Guarantee Annuities and MVAs
Your MYGA contract may also have a market value adjustment (MVA), which allows the insurer to pay a higher rate of interest in the contract.
The tradeoff is that you might have to pay additional penalties for early withdrawals above and beyond the normal surrender charges. But this applies only when you either surrender the contract entirely or you take out sums above your free withdrawal amount (usually 5 to 10 percent of the contract in a MYGA).
One important thing to keep in mind is that the market value adjustment feature in these annuities can change depending on what happens with interest rates. You can ask your financial advisor for more details about whether this might apply to you.
This is done to incentivize clients to keep their money in the contracts until the term has expired.
Payout Options with a MYGA Annuity
A final factor to consider is the payout options when the contract's term is up. Some insurers simply allow the contract to continue earning interest after the surrender term is up.
Other life insurers will either renew the contract with a new surrender charge schedule, allow the owner to withdraw the proceeds without penalty, or elect a different payout option. But in many cases, the annuity owner only has 30 days in which to make this choice.
Failure to act during this time can result in the contract proceeds being moved in a new contract that pays much less interest, and no commission to the client's financial advisor.
Avoid This Situation If You Can
Why might it be a bad thing if your financial advisor weren’t paid, you might ask? Because that would remove their incentive to help you with the management of that policy in the future.
You might find yourself in situations when their help would be advantageous: moving the money into a new contract, tapping it for guaranteed income, or even pulling money from that insurance company altogether.
What Are Some Practical Strategies with MYGA Annuities?
Ultimately, MYGAs (also known as "fixed-rate annuities,” not to be confused with traditional fixed annuities) can be appropriate for retirement savers who are looking for higher growth than they can get from CDs, bonds, or Treasury securities.
They are also excellent vehicles for those who desire a guaranteed growth rate for their money for an extended timespan.
They can also be a great substitute for keeping cash in a low-interest account that someone has no current need for. Of course, that person should understand that they are giving up liquidity and some control of the contract.
Some Final Thoughts About Multi-Year Guarantee Annuities
MYGAs can be excellent instruments for your money if you are seeking guaranteed income for a longer period of time. They earn a guaranteed interest rate, and you can receive a contractually guaranteed income for your lifetime. Just be sure to compare your MYGA contracts of interest with other annuity contracts that might offer higher guaranteed payouts.
You will want to read the fine print before purchasing one of these annuities, as there are a lot of details that you should understand in order to get the best possible contract.
Is a Multi-Year Guarantee Annuity Right for You?
Consult with your financial advisor today for more information on MYGAs and whether they are right for you. If you are looking for a financial advisor or licensed agent to help with your retirement financial decisions, no sweat.
Many financial professionals are available at JenniferLangFinancialServices.com to assist you and answer your questions.
In Summary: 5 Benefits of a MYGA
Tax-deferred growth — No capital gains or current income tax exposure can help clients accumulate more over time.
A choice of guaranteed rate durations — You can choose guaranteed rates for 3, 4, 5, 6, or 7 years
Low minimum premiums and high issue ages — $15,000 minimum premium and issue ages up to 90 years old.
Penalty-free withdrawals — Beginning contract year 2, you can withdraw up to 10% of the last contract anniversary accumulation value.
Rates as high as 2.95% — With principal protection and protection from market losses, it’s an attractive way to build retirement savings in today’s low-interest rate environment.