What is a Fixed Annuity?
Multi-Year Guarantee Annuity is a term used to describe a fixed annuity that has an interest rate guarantee for the same period of time as its surrender period. For example, an annuity with a guaranteed interest rate of 5% per year for five years, where there are no surrender penalties after five years. Some offer a higher rate the first year, and a lower, but guaranteed rate, for all subsequent years of the surrender period – e.g. 8.5% first year, with a guaranteed renewal at 4% for years 2-5 for a blended average of 4.88% per year for five years. The key feature is that you know what interest rate you get for the entire surrender period, and for this reason we ONLY recommend Multi-Year Guarantee Annuities.
Current Top Rates
Top Rates as of 02/26/24
3 Year MYGA
CL Life
CL Sundance 3
6.00%
5 Year MYGA
Wichita National Life
Security 5
6.30%
7 Year MYGA
Nassau Life and Annuity
Nassau MYAnnuity 7X
5.80%
10 Year MYGA
Heartland National
Secure Rate 10
5.80%
Advisor Insight
Derek Stamos
Licensed Professional
Fixed annuities are often overlooked due to bells and whistles associated with indexed annuities. A Multi Year Guaranteed Annuity (MYGAs) pays a constant and guaranteed rate of interest each year during the selected period. The investor can spend the interest as income or allow it to compound inside the contract in a tax deferred basis. The simplicity and predictable outcome allows for many different uses including RMD distributions, wealth transfer and accumulation. As with any annuity contract it is important to understand the differences between the products. The most common mistake is taking the highest interest rate without factoring the liquidity provisions and duration of commitment.
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Fixed Annuity/Multi-Year Annuities
Fixed Rate Include Multi-Year Guarantee Annuities (MYGAs) and CD-type Annuities
Multi-Year Guarantee Annuity is a term used to describe a fixed annuity that has an interest rate guarantee for the same period of time as its surrender period.
Multi-Year Guarantee Fixed Annuities differ from “banded rate” fixed annuities, which may offer a guaranteed interest rate for the first year only and then a renewal rate that can vary – e.g. 8% for the first year and a minimum of 2% for years 2-5, for a blended rate of 3.17% over five years. Banded rate fixed annuities are designed to lure you with a high first-year rate, without being up-front about the uncompetitive blended rate over the entire time horizon. Also, note that banded rate fixed annuities pay the greatest commission to financial planners – on average two to three times the commission on Multi-Year Guarantee Fixed Annuities! So, unfortunately, unscrupulous financial planners may try to sell you an inferior product to increase their own commission. You can read a more detailed discussion of banded-rate annuities, and why we don’t recommend them here.
When evaluating the numerous fixed annuity products on the market, Annuity FYI looks for a) features of the fixed annuity itself; and b) the company issuing the annuity.
Criteria We Use in Evaluating the Annuity:
- The highest rates for all possible guarantee periods.
- Strength of the renewal rate history.
- Correlation of rate period and surrender period, e.g. we don’t favor annuities that offer a three-year guarantee with a six-year surrender period.
- Higher penalty-free withdrawal amounts
- Plans with market value adjustments (MVA). The presence of an MVA doesn’t make the plan bad or good, you just need to know that it exists.
Criteria we use in evaluating the insurance company issuing the annuities and riders are:
- High safety ratings of the issuing company — almost all fixed annuities are in the general accounts of the issuing company, so strong safety ratings are critical.
- Company management, customer service, and ease of account access.
Information
Show Example of Fixed Annuity/Multi-Year Annuities
An annuity with a guaranteed interest rate of 5% per year for five years, where there are no surrender penalties after five years. Some offer a higher rate the first year, and a lower, but guaranteed rate, for all subsequent years of the surrender period – e.g. 8.5% the first year, with a guaranteed renewal at 4% for years 2-5 for a blended average of 4.88% per year for five years.
The key feature is that you know what interest rate you get for the entire surrender period, and for this reason we ONLY recommend Multi-Year Guarantee Annuities.
What are the Differences Between Bank CDs and Multi-Year Guarantee Annuities?
The term Multi-Year Guarantee Fixed Annuity came about because the returns are guaranteed for a fixed period, like bank certificate of deposits (“CDs”). However, the similarities stop there – in fact fixed annuities are very different than bank CDs. Here are the most significant differences between “MYG” fixed annuities and bank CDs:
Bank CDs vs Fixed Annuities Defined
Bank CDs are typically issued by banks. As such, they are covered by FDIC guarantees. Fixed annuities are issued by insurance companies, and are not insured by the FDIC. In almost every case, fixed annuity guarantees are subject to the claims-paying ability of the issuing life insurance company — it is important that you check the latest financial strength ratings of the insurance company before investing any money. Fixed annuities are typically covered by state guaranty funds that protect your investment — $100,000 to $300,000 in most states, and up to $500,000 in states such as New York and Washington. Annuity FYI can furnish you with the latest insurance company financial strength ratings, as well as information about the guaranty provided by your state.
Interest Rates
Fixed annuities typically offer higher interest rates than bank CDs. Check our fixed annuities comparison table to check out the most competitive rates, and compare them to CD rates from a source such as Bankrate.com.
Taxes
Fixed annuities and bank CDs are taxed differently. Unless they are held within a retirement account such as an IRA or 401k, gains on bank CDs are taxed every year; gains on fixed annuities are not, and subsequently your return on a fixed annuity would be greater than a bank CD if the interest rates are equivalent. For example, take an investment of $100,000 at 5% in a CD and a fixed annuity. After year 1, in the fixed annuity you have $105,000. In the bank CD, you have $103,500 (assuming a 30% combined income tax bracket). After five years, the fixed annuity would be worth $127,628, compared with a bank CD of $118,769. If you decided to take income off of the fixed annuity, it will be based on the pre-tax amount — $127,628 in this case. And even if you decided to cash out of the fixed annuity (assume you are over 59½ — see #4 below — and the same 30% tax bracket) you would have $19,339. For an illustration based on your particular investment profile, contact an licensed financial professional at 1-866-223-2121
Keep in mind that if you cash out of a fixed annuity and you are younger than 59½ years old, the IRS will penalize you by taking 10% of interest gains. To avoid the IRS penalty prior to 59½ years of age, you must roll the money into another annuity. In this regard, fixed annuities should be considered retirement vehicles, regardless of the surrender schedule.
Withdrawals
Keep in mind that if you cash out of a fixed annuity and you are younger than 59½ years old, the IRS will penalize you by taking 10% of interest gains. To avoid the IRS penalty prior to 59½ years of age, you must roll the money into another annuity. In this regard, fixed annuities should be considered retirement vehicles, regardless of the surrender schedule.
The most competitive fixed annuities typically permit withdrawals of the previous twelve months’ interest, without an insurance company penalty. Some allow you to withdraw 10% of your premium per year without an insurance company penalty. Bank CDs typically do not permit withdrawals without penalties.
Should I Invest in a Bank CD, or in an Annuity with Multi-Year Guaranteed Returns?
If you are looking for a guaranteed rate of return over a fixed term, Annuity FYI encourages you to research “MYG” fixed annuities – primarily because of their higher interest rate guarantees and tax advantages over bank CDs. However, closely examine the terms and conditions of any fixed annuity before investing.
- Does the fixed annuity have a guaranteed interest rate for the entire rate period, or can the rate change after the first year? If so, what will that rate be?
- Is the guaranteed rate competitive with other products on the market?
- What is the financial strength rating of the insurance company issuing the fixed annuity? What do the ratings mean? Is a rating of “A-” with A.M. Best good or bad?
- What is the guaranty provided by my state?
- Are withdrawals permitted during the term of the fixed annuity?
- What are the insurance company and IRS penalties if I need to withdraw my money early?
- Does the fixed annuity have a Market Value Adjustment (MVA)? How does an MVA affect me?
