A multi-year guarantee annuity (MYGA), like any annuity, is a contract between you (the client) and an insurance company. Mainly, it’s a deferred annuity. This means that, in its most basic form, it provides tax-deferred growth of the premium you deposited and the opportunity to receive lifetime income during retirement. The latter is unique to annuities, because besides Social Security and pensions, no other financial product can contractually guarantee a stream of income that you can’t outlive.
How does my MYGA account value grow?
For starters, MYGAs are a type of fixed annuity. Like all fixed annuities, it provides principal protection and tax-deferred growth at fixed interest rates. That said, it differs from a traditional fixed annuity because of the length of time a MYGA contract guarantees the fixed interest rates.
As indicated in its name, “multi-year guarantee” refers to the fact that the interest rate declared when purchasing a MYGA contract is guaranteed for the length of the contract — no matter the length of the contract. This way, you can count on your account value to grow at the same pace throughout your contract.
For example, a traditional 5-year fixed annuity contract (not a MYGA) typically guarantees interest crediting rates for a year or two — or any time period less than the full five years of the contract. This means the interest rate can fluctuate throughout the length of the contract and potentially limit the growth of your account value.
However, a 5-year MYGA rate would be guaranteed for the duration of the contract — the full 5 years in this example.
Therefore, the potential growth of your money is mainly dependent on two things:
- The interest rate guarantee period you choose: F&G currently offers 3-, 5- and 7-year MYGAs.
- The interest crediting rate declared at the time of issuing the contract: The rates offered on MYGAs differ amongst insurance companies.
It’s important to understand that the appropriateness of the different interest crediting rate and term combinations provided by MYGAs will depend on your financial situation.
Be sure to consult with your financial advisor to see what options are the best for you.
Keep this in mind when withdrawing from a MYGA
MYGAs are subject to surrender charges, which could mean you pay a penalty if you take money out before the contract has ended.
Most insurance companies offer a penalty-free withdrawal provision that allows you to withdraw some money during the contract, usually a specific dollar amount or specific percentage of money in the contract, without having to pay fees.
Other provisions may include the ability to take penalty-free withdrawals due to a terminal illness or being confined to a nursing home or hospital.
MYGAs and CDs: What’s the difference?
MYGAs and Certificates of Deposit (CDs) are typically compared to each other because both offer a guaranteed rate of return and principal protection. Unlike stocks, these products provide your interest rate up front, and it’s locked in during the guarantee period.
However, there are six key differences between MYGAs and CDs:
- A MYGA is a contract with an insurance company, and CDs are issued by brokers and banks.
- MYGAs are subject to state insurance regulations, and CDs are FDIC-insured.
- MYGAs offer tax-deferred growth, and the interest on CDs are taxed each year.
- MYGAs may offer more competitive interest rates than CDs.
- MYGAs may have penalty-free withdrawal provisions that allow for specified amounts of partial withdrawals each year. CDs typically tax early withdrawal penalties for taking out money prior to maturity.
- MYGAs may offer benefits beyond accumulation, such as additional benefit riders (e.g., home health care, nursing home and added death benefits).
Is a MYGA the right choice for you?
You can have a conversation with a financial advisor about what product ultimately makes the most sense for you based on:
- Your financial goals and objectives
- What other financial vehicles you already have in your retirement portfolio
- Your age and where you’re at in the retirement process: accumulation phase or distribution phase