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% 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.
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.
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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 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, by clicking here, or by calling 1-866-223-2121
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.
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 Annuity FYI Expert 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.
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. If you are uncertain, contact an Annuity FYI Expert contact an Annuity FYI Expert by Internet/e-mail, or call 1-866-223-2121
- 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?