Question: I’ve been trying to do some research on fixed rate products, and want to know the difference between a Traditional Fixed Annuity and a MYGA annuity. What is the difference, if any? from Robert in Chicago, Illinois
Answer: Good question Robert, and yes there are distinct differences between Traditional Fixed Annuities and MYGA (Multi Year Guarantee Annuities) annuities or sometimes called fixed rate annuities. Let take a closer look at both from an excerpt from my book, The Annuity Stanifesto.
Traditional Fixed Annuity
Traditional Fixed Annuity provides an interest rate that is guaranteed one year at a time, but with an ongoing minimum guaranteed rate as well. A lot of times, this strategy has some sort of upfront bonus to enhance the first year return number and also allows you to add money to the policy at any time.
Upside: Traditional Fixed Annuities normally track rising or falling interest rates, which can be a positive when it is time to renew or lock in the annual rate on your annuity anniversary date. This is a good strategy to guarantee a fixed rate every year, and have a good chance of locking in any upswing in rates as well. Also, when compared to a Fixed Indexed Annuity (FIA), Traditional Fixed Annuities typically have a higher contractual minimum guarantee. In addition, this is one of the few fixed rate strategies that allows you to add money to the policy after the contract has been issued and still benefit from the contractually guaranteed rate.
Downside: When interest rates are low, Traditional Fixed Annuities are not very attractive and many carriers stop offering them during those low rate periods. However, as rates move up, you will see this strategy come back into favor.
Stanalysis©: For the person looking for fixed rate guarantees, a Traditional Fixed Annuity is a good strategy to lock in a rate annually and be able to benefit from rising interest rates as well. I really like these products as a unique and flexible addition to any fixed allocation part of a portfolio.
MYGA – aka “Fixed Rate Annuity”
Fixed Rate Annuities function a lot like CDs, and are referred to in the industry as “Multi Year Rate Guaranteed” annuities (MYGAs). In essence, MYGAs are CDs….but with tax deferral, and are typically purchased with a single premium amount of money.
MYGAs pay a specific percentage yield for a contractually certain amount of time. The main difference between the two strategies is that with CDs, you pay the taxes annually on the interest earned. With Fixed Rate Annuities, you defer the taxes on the interest until money is taken out. The interest rate compounds tax deferred, which is important to know from a comparison standpoint.
My advice to clients is that if your time horizon is more than two years, then you should consider the purchase of a Fixed Rate Annuity (MYGA). If your time horizon is less than two years, then you should probably place the money in a CD or Money Market. Fixed Rate Annuities are typically offered in 2, 3, 4, 5, 6, 7, 8, 9, and 10+ year guaranteed rate lock in periods. Like CDs, there are surrender charges if you take all of your money out before the specific contract period ends, but most MYGAs allow you an annual 10% penalty free withdrawal if some liquidity is needed.
Upside: Fixed Rate Annuities (MYGAs) have no internal fees and pay low commissions (built in) to the agent or advisor. Typically, MYGAs normally pay a higher contractual interest rate than a CD, and interest earned compounds tax deferred until you take the money out. With these MYGA strategies, you will know exactly what your rate and account value will be in the future, contractually guaranteed.
Downside: Similar to CDs, surrender penalties can be high if you want all of your money back before the specified term ends. Also, you have to pay attention to the contract because some MYGAs automatically renew and restart surrender charges at the end of the guarantee period, unless you proactively contact the annuity carrier with your intentions. In addition, some guarantee periods don’t match up with the surrender periods. As with any annuity, always know what you own, how it works, and the contractual rules in place.
Stanalysis©: Fixed Rate Annuities are a great alternative to CDs if your time horizon is more than two years. There are 20 to 30 competitive companies in this category, and I represent and can quote the vast majority.
I hope this clarifies things for you concerning these 2 distinct strategies, and look for my book (The Annuity Stanifesto) to be available on Amazon and bookstores nationwide later this year.
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