Understanding Multi Year Guarantee Annuities
One of the newest additions to the roster of annuity types is the Multi-Year Guaranteed Annuity (MYGA).
A MYGA is a hybrid of a fixed annuity and a certificate of deposit (CD). In fact, they are often referred to as CD annuities or tax-deferred CDs.
What makes them like a fixed annuity is they credit a fixed rate of interest each year. What makes them different from a fixed annuity and somewhat like a CD is that the fixed rate is guaranteed for the full contract term. That means if you own an annuity with an eight-year surrender charge period, the crediting rate is guaranteed all eight of those years.
Fixed annuities, although offering the same guaranteed rate, only guarantee it for part of the term, though there is usually a contracted minimum that the contract can never fall below.
MYGAs provide an additional level of certainty in retirement planning because of the longer guarantee period. They were created to address the uncertainty involved with fluctuating interest rates.
Because of this, they are often purchased more for their accumulation potential than for income, and they fulfill the conservative part of an investor’s portfolio.
That also means you’re potentially stuck with a lower interest rate on a MYGA if overall interest rates increase and boost the crediting rates on traditional fixed annuities.
At the same time, they offer benefits over CDs. First, MYGAs typically credit a higher interest rate than CDs.
Short-term CDs typically pay interest at maturity. CDs with terms of two to five years or more will often pay interest as income, either monthly, quarterly or semiannually, then return the owner’s original principal at the end of the term. If you invest $100,000 in a 5-year CD paying a 2.35 percent yield, it would pay you around $200 a month for five years. At the end of the term, you would get the original $100,000 back. The longer the term, the higher the rate.
Annuities provide greater flexibility on how they pay out income. Unlike CDs, some annuities can pay out a lifetime income stream, regardless of how much interest it earns. A 60-year-old investing in a $100,000 MYGA could receive $500 in monthly income for the rest of his or her life.
MYGAs also offer the benefit of tax-deferred growth as typically offered by annuities, whereas CD growth is taxed each year.
Plus, if you own a MYGA that offers free partial withdrawals, you have more liquidity than you would with a CD. A typical MYGA allows a withdrawal of up to 10 percent of the initial investment or the account value per year. CDs, on the other hand, require you to cash out the entire account and pay a sizable surrender charge.
Another advantage of the MYGA over the CD is that if the owner dies, the annuity will pass immediately to a named beneficiary, while a CD can be tied up in probate.
One of the advantages of CDs is that, because they are bank products, they are insured by the Federal Deposit Insurance Corp. (FDIC). That means if the issuing bank fails, the FDIC will insure the CD up to an amount of $250,000.
Annuities are backed by the issuing insurance company. State guaranty associations do insure policy holders against the failure of insurance companies, but not to the extent of the FDIC.
Another caution on owning a MYGA is that some automatically renew and restart surrender charges at the end of the guarantee period unless you contact the annuity carrier to exercise another option.