A multi-year guaranteed annuity (MYGA) is a type of fixed annuity that offers a guaranteed interest rate for a set period, much like a certificate of deposit (CD). It’s a safe and predictable way to grow your savings over time. MYGAs are ideal for individuals looking for stability and steady returns without market risks. With flexible terms and tax-deferred growth, they’re a smart option for long-term financial planning.

Benefits of MYGAs

MYGAs offer several advantages, making them attractive for those seeking stable returns. They provide a guaranteed interest rate for a fixed term, offering predictability and protection against market volatility. This predictability is particularly appealing for conservative investors or retirees seeking steady income. 

Additionally, MYGAs allow interest to grow tax-deferred until withdrawal, potentially enhancing the growth of your investment. They often feature higher rates compared to other fixed-income options, like CDs, which can be beneficial in a low-interest-rate environment. MYGAs typically allow for penalty-free withdrawals after the lock-in period, offering some liquidity while still ensuring a stable income stream.

Drawbacks of MYGAs

Despite their benefits, MYGAs have potential drawbacks. They require a long-term commitment, often locking in funds for several years with penalties for early withdrawal. This lack of liquidity can be a downside for those needing quick access to their investment. Additionally, while MYGAs offer fixed returns, they may not keep pace with inflation over time, potentially eroding purchasing power. Unlike market-linked investments, they don’t benefit from equity market gains. 

Further, though MYGAs grow tax-deferred, withdrawals are taxed as ordinary income, which might be higher than capital gains tax rates applicable to other investments. Selecting a MYGA may also require careful consideration of insurer credit ratings and financial stability.

What Is a Fee-based MYGA?

A fee-based MYGA offers guaranteed interest over a set term like typical MYGAs, but instead of commissions, it charges a transparent management fee. Unlike traditional MYGAs, which often embed agent commissions within rates, fee-based MYGAs appeal to investors seeking lower costs and who work with fee-only financial advisors. Beware of a lower overall yield however due to ongoing annual fees from the advisor selling it to you.

You might choose a fee-based MYGA if you prefer clear fee structures and have an advisor managing your portfolio, aiming for potentially better net returns. In contrast, a regular MYGA might be easier if you’re comfortable with commission-based models or don’t have an advisor. Fee-based MYGAs are suitable for transparency-focused, fee-conscience investors who are okay with a possible lower rate of return over time due to advisory fees.

MYGA vs. Fixed Annuity vs. CD

MYGAs, fixed annuities, and CDs are all financial products that provide guaranteed returns but each differs in structure and purpose. MYGAs and fixed annuities are insurance contracts offering a predetermined interest rate over a specific term, usually beyond one year. MYGAs specialize in multi-year terms while traditional fixed annuities such as SPIA/DIA contracts can offer lifetime income and period certain options. Both are suited for long-term retirement planning, offering tax-deferred growth. 

Alternatively, CDs are bank products with terms ranging from a few months to several years, providing interest income without tax deferral. Withdrawals from CDs before maturity incur penalties, whereas annuities may have withdrawal provisions or surrender fees. MYGAs often offer higher rates than CDs due to their longer-term commitment and connection to insurance benefits. Typically, MYGAs and fixed annuities are chosen for retirement income strategies, while CDs are used for short-term savings and predictable interest earnings.

MYGA With Terminal Illness Rider

A MYGA with a terminal illness rider differs from a typical MYGA by offering flexibility in times of medical crisis. While a standard MYGA locks in your investment over a fixed term with guaranteed interest, a terminal illness rider allows early withdrawal without penalties if diagnosed with a terminal illness. 

This option is ideal for individuals seeking financial security who wish to access their funds for urgent medical needs. Upon diagnosis, the rider facilitates penalty-free fund withdrawal, providing crucial financial support while preserving initial MYGA benefits. This feature aligns risk management with personal health considerations, offering peace of mind.

Average MYGA Rates

MYGA rates have generally ranged from 2% to 6% but they can vary — and even fall outside this range — depending on the term length and the institution from which they’re purchased. 

Factors affecting these rates include market conditions, economic environment, and the insurer’s financial strength. For instance, longer-term MYGAs often offer higher rates. To find competitive rates, consider comparing offers from multiple insurers, using online tools, or consulting with a financial advisor.

An insurer’s financial strength comes into play, as this is its ability to meet its policyholders’ claims and obligations both now and in the future. This strength is a critical indicator of reliability and stability in receiving your payments. To assess an insurer’s financial strength, you can review ratings from independent agencies like A.M. Best and Standard & Poor’s, which evaluate insurers based on factors such as capital reserves, investment choices, and risk management strategies. 

Is a MYGA Right for Me?

A MYGA is typically most beneficial for individuals seeking a secure, fixed-rate return on their investment, particularly retirees or those approaching retirement. It appeals to risk-averse investors who prioritize capital preservation over growth and want a predictable income stream.

When considering a MYGA, ask yourself:

• What is the guaranteed interest rate, and for how many years is it locked in?
• How does the rate compare to other fixed-income products or investment options?
• What is the financial strength rating of the issuing insurance company?
• Are there any penalties for early withdrawal, and what are the terms of liquidity?
• How does a MYGA fit into my overall financial plan and retirement goals?
• What are the tax implications of the investment?

Answering these questions can help determine if a MYGA aligns with your financial needs and goals.

Exploring options like MYGAs and other annuities can enhance your financial strategies for a secure retirement. These products offer benefits like guaranteed interest rates and tax-deferred growth. By understanding the diverse annuity landscape, you can tailor choices to meet your financial goals, providing stability and peace of mind for your future.