Annuity Comparison: FIA vs. MYGA

Hello, America, Stan, The Annuity Man, America's Annuity Agent, licensed in all 50 states. I'm glad you joined me today. We have a great topic: annuity comparisons. We're diving into Indexed Annuities, Fixed Indexed Annuities (FIAs), versus Multi-Year Guarantee Annuities (MYGAs). FIAs versus MYGAs — the ultimate cage battle. I mean, that’s it. Which one do you want, FIAs versus MYGAs? Which one fits? Do they fit? Should they fit? Can they fit into my portfolio? We're going to go through all of that. I think I just blew out my shoulder, throwing a punch, but I'll do anything for you. I'll lay it on the line, even get injured for you. Yes, that's what Stan The Annuity Man does.

What are Indexed Annuities and MYGAs?

Let’s talk about Indexed Annuities and Multi-Year Guarantee Annuities. A little background on both: Indexed Annuities, also called Fixed Indexed Annuities (FIAs), were developed in 1995 to compete with CD returns. When CD returns were in that normal 2 to 4% range, that’s when Indexed Annuities came into play. The returns on Indexed Annuities are based on a call option on an index, typically the S&P 500. I’ve done many videos on Indexed Annuities, and if you want to dig in further, I’ve also written Owner’s Manuals on Indexed Annuities and Multi-Year Guarantee Annuities. You can download them for free, under no obligation. Two of them cover Indexed Annuities and MYGAs. No one’s going to call you or show up at your doorstep.

It’s all part of the education process that I believe in. But Indexed Annuities, in my opinion, are the most mis-sold and misrepresented product in the annuity world. The pitches sound too good to be true because they are. By the way, if any annuity sales pitch sounds too good to be true, it is every single time. No exceptions. Indexed Annuities can be a high-commission product depending on the surrender charge period, but there are a few one-liners about them that aren't really true. Here they are:

• "Market upside with no downside." Only part of that is true — the no downside part. The market upside part? Not true.
• "Market participation with principal protection." The principal protection is true, but the market participation — it’s not quite saying you’ll get market returns. You’re not. Can you get that in a one-year contract? Maybe, but the blended returns are generally in the 2-4% range.

We love Indexed Annuities when you fully understand what they do, how they work, and the realistic return expectations. We also use them as a cost-effective and efficient delivery system for Income Riders. Income Riders is another book you can download. These provide a future pension guarantee — a way to turn on an income stream at a future date by attaching an Income Rider to an Indexed Annuity.

What are Multi-Year Guarantee Annuities (MYGAs)?

Let's talk about Multi-Year Guarantee Annuities (MYGAs), the annuity industry's version of a CD. For many of you, a CD is a Certificate of Deposit. If you don’t know what that is, a lot of you have purchased CDs. You go into the bank, and if you remember the Jimmy Carter days, you could get a 12% CD. It means you put money in, and they pay you a specific percentage every year for a duration you choose, whether it’s six months, one year, two years, three years, and so on. A CD is backed by the FDIC, which is the best backing you can get.

But MYGAs are issued by annuity companies. They’re backed by the full faith and credit of those carriers. There are state guaranty funds that back them as well, but never use that as part of your decision-making. Always base your decision on the Claims-Paying Ability of the annuity company. The state guaranty fund cannot be part of the sales pitch. MYGAs are like CDs, paying a specific percentage for the duration you choose. There are no annual fees, no moving parts, and no market attachments. It’s straightforward and simple. You can explain a MYGA to a nine-year-old — no offense to nine-year-olds, but they would get it seriously. "Aha, I get it. Pass me the Game Boy."

Comparing Indexed Annuities vs. MYGAs

So, the question is, which one’s better? Let’s compare them. Indexed Annuities versus MYGAs. Let’s look at the similarities:

• Both are CD products that create CD returns.
• Both have no annual fees, if you buy them as standalone products (Indexed Annuities without Income Riders).
• Neither product will lose money if the markets go down. If the market crashes or chaos hits, you won’t lose any money in either product. That’s a good thing.

However, Indexed Annuity salespeople typically don’t show you MYGAs because Indexed Annuities often have higher commissions than MYGAs. As my CEO points out, all annuity commissions are built into the product — it’s like your light bill, water bill, and commission, which are all part of the administrative costs. When you put in $100,000 or whatever, you see that $100,000 working for you. Yes, the annuity agent got paid a one-time commission — that’s how we make a living. But with Indexed Annuities, typically, what you’re being shown are longer-term surrender charge products. MYGAs, on the other hand, can be as short as two years, with no annual fees or moving parts.

Which One Should You Choose?

If your time duration is less than five years, then MYGAs are the better choice for you because the yield is contractually guaranteed. With Indexed Annuities, the return is not guaranteed because it's based on a call option. And while there are two-, three-, four-, and five-year call options, the majority are one-year options. We just don’t know what that return’s going to be. If the market goes down, you won’t lose any money, but if it goes up, you’ll get a limited return. Those limitations come from participation rates, caps, and spreads.

If short-term duration is your goal, then MYGAs are the choice. If you want long-term durations and possibly a future income stream using an Income Rider, then Indexed Annuities work. Can you use both? Yes. Let me give you an example:

I got a call the other day from someone wanting to create a fixed ladder. I said, "Do you want MYGAs or Indexed Annuities?" He said, "Let’s look at both." I explained that MYGA yields are contractual, while Indexed Annuities are not. We ended up with a three-year MYGA, a four-year MYGA, and a five-year MYGA, plus a seven-year Indexed Annuity. He understood that the three, four, and five-year MYGAs had guaranteed yields, but the seven-year Indexed Annuity didn’t. It might provide a better return than the MYGAs, but we couldn’t guarantee it. But the principle was protected in all cases.

Conclusion

So, MYGAs or Indexed Annuities? It really comes down to how long you want to lock in. At the time of this taping, the sweet spot is around five years for yield. Both are great products for principal protection. Remember my PILL analogy — Principal Protection, Income for Life, Legacy, and Long-Term Care. Both fall under the “P” for Principal Protection. Neither will give you market-type returns, but they fit into a portfolio if you’re looking for stability and yield.If you want guaranteed income in the future, you can attach an Income Rider to an Indexed Annuity.

MYGAs and Indexed Annuities — I’ve written books on both, and you can download them for free. You can get quotes on both at my site. Visit the live MYGA feed, request an Indexed Annuity quote standalone, or an Indexed Annuity with an Income Rider quote, and we’ll send it to you at no cost and with no obligation. You can run the quotes 24/7.

Thanks for joining me today, and I’ll see you on the following Stan The Annuity Man blog.