Did you know that there are annuities that will give you a guaranteed rate of interest with a short-term agreement? These are referred to as “MYGA’s”.
So, what the heck is a “MYGA”? MYGA stands for, “Multi-Year Guaranteed Annuity”. It is a category of annuity that has the same element of safety as other fixed annuities but is very straightforward in how it works.
Unlike Fixed Indexed Annuities, there are no indexing options to choose from. No Caps, Spreads, or Participation Rates to decipher. It’s a very simple product.
A MYGA is a financial product issued by an insurance company. It operates very much as a Bank CD does. It’s a guaranteed amount of interest, for a guaranteed amount of time. However, it has been my experience that MYGA’s sometimes pay 2-3 times more than a Bank CD.
For example, A 3-Year MYGA @ 3% interest will pay you 3% compounding interest for 3 years. It’s really that simple.
MYGA’s come in terms of 2-20 years. It has been my experience that you do not get much more benefit from committing to a 20-year MYGA than you would from a 5-year MYGA. So, you’re probably better off sticking with a shorter term. No more than 5-years.
If you are looking for a place to park money that is wasting away in a savings account or CD, is being attacked by inflation, or you just want a short-term product that guarantees your principal and will give you a predictable return, then a MYGA could be right for you.
What are the term lengths of MYGA’s?
MYGA are offered in terms of 2-20 years. However, it has been my experience that you do not get a whole lot more benefits for a longer commitment. Usually, a 5-year MYGA will pay about the same as a 20-year MYGA. So, there really is no benefit to a longer commitment.
Can I access my money from a MYGA?
Yes! There are several options depending on which insurance company you are dealing with. Those options are:
- Interest Only. You can receive your interest every year of your term.
- Penalty-Free Withdrawal. You can access 5%-15% of your total Account Value (principal + interest) throughout the term. Normally, this will start at the beginning of the 2nd year of the term. Every company offers different options.
- Lump sum at the end of the term. The entirety of your principal and interest will be paid to you at the end of the term you have selected.
- Long-Term Care or Terminal Illness Diagnosis. If you find yourself if the unfortunate situation of needing Long-Term Care or you are diagnosed with a terminal illness, 100% of the funds are released with no penalties.
What happens if I need the money back?
MYGA’s follow a surrender schedule like every annuity. So, if you believe you will need more than the interest or the 5%-15% Penalty-Free Withdrawal, then this is probably not the product for you. You may be better off just keeping the money liquid in a bank account or money market.
How does the Insurance Company pay more than a Bank CD?
Without getting too much into the weeds, because I do not have the mind of an actuary, the Insurance Company buys long-term investment grade bonds with your premium. They can get a much better return than you or I can as individuals because they are doing it with hundreds of millions of dollars, and they can hold them a lot longer than you or I could.
Whatever the difference is between the return they can get on their portfolio, minus their operating cost and a small percentage for profit, that is the rate that they will guarantee you.
How does the Insurance Company guarantee my principal?
Insurance companies must operate on a very different playing field than investment banks. They are not allowed to risk your money. They are much more regulated, and they have several safety nets that can protect you in case of insolvency (very, very rarely ever happens to life insurance companies). Things such as re-insurers and the State Guarantee Fund are a couple of those safety nets. I am not allowed to talk about the benefits of those things, but you can certainly research them on your own.
If you really want to be floored, look up how much the FDIC would owe if there was a major banking collapse. Then look up how much they actually have to meet those obligations. It should make you think twice about keeping too much of your money in a bank.
When it comes to life insurance companies that issue annuities, it’s probably a good idea to stick with a B++ rating or above. Although the “letter grade” is important, it’s not everything. You should also check out the insurance company’s “solvency ratio”, and/or their “risk-based capital” score.
Are there any fees with MYGA’s?
No. At least not the ones I offer.
How does the advisor get paid?
The advisor gets paid a one-time commission directly from the insurance company’s general fund. Nothing comes out of your pocket, and you will earn interest on 100% of your principal.
Can I get a guaranteed income from a MYGA?
Yes! However, that is not very common. You could be better off transferring your money to another annuity that is designed for maximum income payout. But yes, you could get an income.
The downfall to using a MYGA for a guaranteed income is that you would have to “annuitize” the principal, i.e., you would have to surrender it to the insurance company in exchange for the income.
Can I use Qualified Money (IRA, 401(k), 403(b), etc.)?
Yes! You can transfer money from an IRA, or any other tax-deferred account, without penalty or paying taxes to fund a MYGA. All the same rules apply in regard to RMD’s.
Are there age limits on MYGA’s?
Yes, there are age limits. But there are companies will except funds until the age of 90. However, some of those companies may offer a lower interest rate due to age. It is more for protection on their part for having to free up the funds early in-case of a death benefit being paid to your beneficiaries.
How do I fund a MYGA?
I’m glad you finally asked! The first thing you can do is check out my Atlas Annuity Rate Report in the Newsletter section that is released monthly to see if any of the rates and terms meet your expectations. And then, call me at 636.926.6500, or book a time by clicking the “Schedule A Call” button so we can have a short conversation to determine if a MYGA is a good fit for you and your financial goals!
All the best,