MYGA stands for Multi-Year Guaranteed Annuity. It is a type of fixed annuity that guarantees an interest rate for a set number of years. Many people compare MYGAs to CDs because they both offer safety and a guaranteed rate for a period of time. One key difference is that growth in a MYGA is tax-deferred until you take money out. A MYGA is also funded with one lump sum, which means you typically cannot add more money later.
MYGAs do not have an annual fee. You earn the rate stated in the contract for the length of the guarantee period. At the end of that period, you can review your options for what to do next.
You can purchase a MYGA with non-qualified money (after-tax funds) or with qualified money such as IRA funds. In most cases, Roth IRA money may also be used.
Why do people consider MYGAs?
For some people, a MYGA can be a good fit when they want:
- protection from market loss
- a guaranteed rate for a set period
- tax-deferred growth
- a simple, predictable option for part of their retirement savings
A MYGA may be especially appealing to someone who does not need full access to all of their money right away and prefers stability over market risk.
Think of a MYGA as a place to “park” a portion of your money for a set number of years. You are not trying to chase the stock market. You are choosing a guaranteed path and knowing ahead of time what rate you will earn.
If you are comparing MYGAs, here are a few important things to look at.
How does the interest work?
Most MYGAs credit compounded interest, which means you earn interest on both your original premium and the interest already credited to the contract. Some MYGAs use simple interest instead, which means interest is calculated only on your original premium.
For example, if you put $100,000 into a MYGA earning 6% simple interest for 5 years, you would earn $30,000 in interest. At 6% compounded interest for 5 years, that same $100,000 would grow by $33,822.
In some cases, simple interest may still make sense, especially if you plan to take interest withdrawals along the way.
What you should know about withdrawals and death benefits
Withdrawal rules vary from one MYGA to another. Some contracts allow limited withdrawals each year, while others do not. In general, MYGAs with more restrictions may offer a higher rate because the insurance company can plan on holding the money for the full term.
Death benefits can also vary. Some MYGAs pay less than the full accumulated value if the owner dies during the surrender period, unless the contract includes stronger death benefit provisions.
When a MYGA does not include built-in withdrawals or a full death benefit, it may offer optional riders that add those features. In exchange, the guaranteed rate is usually lower.
For example, a MYGA might offer 6.00% for 5 years with no withdrawals and a reduced death benefit during the surrender period.
If the contract offers optional riders, the rate might change like this:
- Add an interest withdrawal rider: 5.90%
- Add a full value death benefit rider: 5.75%
- Add both riders: 5.65%
This is why it is important to compare not just the headline rate, but also what features are included. Choosing a MYGA based only on the highest rate can be a little like choosing a car based only on the sticker price. The price matters, but so do the features, restrictions, and fine print. With MYGAs, the rate matters, but so do withdrawal rules, death benefits, and renewal provisions.
A note on the death benefit. If a spouse is named as primary beneficiary, most contracts allow a spousal continuation or spousal takeover. At the end of the guarantee period, there are no surrender charges, and the full value of the annuity can be taken out.
For example, imagine a married couple, Tom and Susan, putting part of their savings into a 5-year MYGA. If Tom owns the contract and passes away in year three, Susan has the option to continue the annuity as her own rather than cashing it out immediately. In this situation, getting a lower rate for an enhanced death benefit may not be necessary.
What happens when the guarantee period ends?
When the guarantee period ends, many MYGAs enter a renewal window. The insurance company will notify you of the new rate being offered for the next term. If you do nothing during that window, the contract may automatically renew into a new guarantee period with a new rate and a new surrender charge schedule.
When your term ends, your options include:
- Taking your money out.
- Moving it to another account or annuity.
- Renewing for a new term at the rate available at that time.
- Electing an income option (rarely used)
Some MYGAs do not automatically renew. After the guarantee period ends, the contract is fully liquid, and any rate credited after that point is typically declared by the company and can change.
Be sure you know what happens at the end of your MYGA term, so you don’t end up locking into a new term you didn’t want.
At AnnuityPath, we contact our MYGA clients before the end of the term, so they have time to review their options and avoid an unwanted renewal. The goal is simple: make sure you understand your choices and can decide what makes the most sense for you.
Final thoughts
A MYGA can be a useful option for someone who wants safety, predictability, and a guaranteed rate for a set period. But not all MYGAs work the same way.
Before choosing one, make sure you understand the rate, the restrictions, the death benefit, and the renewal process.
If you are interested in a MYGA or if you already own one and want help understanding how it works, feel free to give us a call at 888-736-2396 or click here to schedule a call.
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