Annuity Comparison: FIA vs. MYGA (TAM Classic)

Hello America, Stan The Annuity Man. America's annuity agent licensed in all 50 states. I'm glad you joined me today. This is a great topic. We're doing annuity comparisons. We're doing Indexed Annuities, Fixed Indexed Annuities versus Multi-Year Guarantee Annuities, which are called MYGAs. That's FIAs versus MYGAs, the ultimate cage battle, bam, bam, kick. Pfft, chi, pow. I mean, that's it. FIAs versus MYGAs. Which one do you want? Which one fits? Do they fit? Should they fit? Can it fit? Will they fit into my portfolio? We're going to go through all of that, and I think I just blew out my shoulder, throwing a punch. But yeah, I'll do anything for you. I'll lay it on the line for you. I'll get injured for you, Stan The Annuity Man.

Fixed Index Annuities

So, let's talk about Index Annuities and Multi-Year Guarantee Annuities. A little background on both. Index Annuities are also called Fixed Index Annuities. FIAs were developed in 1995 to compete with CD returns. When CD returns were kind of normal, that 2% to 4% range, that's what they were put on the planet for. Now, the returns on Index Annuities are based on a call option on an index. Typically, it's the S&P 500. I've done a ton of videos on Index Annuities if you want to dig in further.

I've also written owner's manuals on Index Annuities and Multi-Year Guarantee Annuities. You can download them both for free by clicking on this link. Two of those are on Index Annuities, and one is on Multi-Year Guarantee Annuities. No one will call you or show up at your doorstep.

It's part of the education process that I believe should be part of the process of buying an annuity, which is these blogs and the books that I've written. I also do a podcast called Fun With Annuities, where we talk about annuities and other things.

Misrepresented

But Indexed Annuities are really, in my opinion, the most mis-sold and misrepresented product in the annuity world. The pitches sometimes 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. There are absolutely no exceptions to that. Index Annuities, for whatever reason, agents, it can be a high-commission product depending on the surrender charge time period. But Index Annuities have a pretty good couple of one-liners that aren't really true. Here they are, market upside with no downside. The only part of that's true is the no downside part. The market upside part is not true.

Income Riders

Or market participation with principal protection. The principal protection is true. The market participation, it's kind of saying, "You're going to get market return." No, you're not. Can you get that maybe one year out of a 10-year contract? Maybe? But the blended returns are kind of a 2% to 4% range with Indexed Annuities. 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. That's another one of the books in the six that you can download for a future pension guarantee. In other words, you turn on an income stream at a future date by attaching an Income Rider to an Index Annuity.

So, that's Index Annuities. There's not one Index Annuity that's better than the other, regardless of what the bad chicken dinner seminar guy said. Regardless of what the local radio guy on Saturday morning said or what the banker who showed you one Index Annuity product said. They're commodity products like all annuity products. Indexed Annuities are not market products. They're life insurance products. They're not securities. They're issued and regulated at the state level, and they're not too good to be true, but they're pretty darn good when you understand them for what they do.

Multi-Year Guarantee Annuities

Let's talk about Multi-Year Guarantee Annuities. MYGAs, M-Y-G-A-S. That's the annuity industry version of a CD. So, for many of you out there, a CD is a Certificate of Deposit. Many of you have purchased CDs. You go in the bank, and if you remember the Jimmy Carter days, you could get a 12% CD, meaning that you put money in, they're going to pay you a specific percentage every single year for a duration that you choose, whether it's six months, nine months, 12 months, one year, two years, three years, four years, or five years.

That's a Certificate of Deposits backed by the FDIC, the best backing you can get. But Multi-Year Guarantee Annuities, the annuity industry version of a CD, those are issued by annuity companies. The annuity carriers, they're backed by the full faith and credit of those annuity carriers. There are state guaranty funds that back them as well, but never use that as part of your decision. Always base it on the Claims-Paying Ability of the annuity company. And by the way, the state guaranty fund cannot be used in a sales pitch. No one can say, "Oh, buy this because there's a state guaranty fund." No. But Multi-Year Guarantee Annuities are CD products. They're going to pay a specific percentage for the duration that you choose. No annual fees, no moving parts, no market attachments. It is direct. It's straightforward. You can explain it to a 9-year-old, no offense to nine-year-olds. But you could explain a MYGA, they'd be like, "Uh-huh, I get it. Yeah, uh-huh, uh-huh. Pass me the Game Boy." Or whatever they're playing. I mean, seriously, they would understand it. So, the question is, which one's better? Let's compare them: Index Annuities versus Multi-Year Guarantee Annuities.

Similarities

Let's look at the similarities. They are both CD products that are going to create CD returns. They both have no annual fees if you just buy them as a standalone. If you buy the Index Annuity without the Income Rider, there are no annual fees. They're both pretty straightforward from that standpoint. You're not going to lose any money if the markets go down. If the market goes crazy and your Learjet hits the mountain, or the president's Learjet hits the mountain and there's chaos in the markets, you won't lose any money with either of them. That's a good thing.

Commissions

However, Indexed Annuity salespeople typically don't show people Multi-Year Guarantee Annuities because Indexed Annuities usually have a higher commission than Multi-Year Guarantee Annuities. Now, all commissions with annuity types are built into the product. As my CEO points out, it's like having the light bill, water bill, and commission are all part of the administrative costs. It's built in. When you put in $100,000 or whatever, you'll see that $100,000 goes to work for you. And yes, the annuity agent got paid a one-time payment. "Stan The Annuity Man, that's how we make a living." But the Indexed Annuity side, typically what you're being shown out there are longer-term surrender charge products. Now, Indexed Annuities do have short-term surrender charge products like a five-year, or I've even seen four-year Indexed Annuities. But the potential Indexed returns aren't as good as when you buy the seven-year or 10-year surrender charge product.

Duration

With a Multi-Year Guarantee Annuity, you can buy at the time of this blog as short a term as two years. And sometimes, in the past, when interest rates were a little better, you could buy a one-year, but two-year, three-year, four-year, five-year. If your time duration and where you want to lock in is less than five years, then Multi-Year Guarantee Annuities will be the better choice for you because the return, the yield, is guaranteed contractually. With an Indexed Annuity, that return is not contractually guaranteed. We don't know what the return will be based on a call option. Typically, it's a one-year call option. And, of course, in the Indexed Annuity world, there are two and three and four-year call options, and five-year call options. But the majority are one-year call options. We just don't know what that return's going to be.

If the market goes down, you're not going to lose any money. If the market goes up, you're going to get a limited return. And those limitations in the industry are based upon what's called participation rates, caps, and spreads. But the point is, if the short-term duration is the goal, then MYGAs are your choice. If long-term durations and possibly a future income stream using an Income Rider is your choice, then Indexed Annuities work. Can you use Indexed Annuities and Multi-Year Guarantee Annuities together? The answer is yes. Let me give you an example.

Client Example

I got a call the other day, and the guy said, "I want to put together a fixed ladder." I said, "Well, do you want Multi-Year Guarantee Annuities, or do you want Indexed Annuities?" He goes, "Index Annuities." He said, "Let's look at both." I explained the fact that the Multi-Year Guarantee Annuity yield is contractual, and the Indexed Annuity returns are not contractual other than you're not going to lose any money. So, we came up with a three-year MYGA, a four-year MYGA, and a five-year MYGA, and then we did a seven-year Indexed Annuity. We had a ladder of three, four, five, and seven. No riders attached to the seven-year, and hopefully that seven-year gets a little bit more return than the MYGAs do. But he understood that it might not. But that was kind of the risk of what he was trying to do. But really, there's no risk to the principal because the principals are protected. But he knew that three out of the four of those tranches, he knew the exact contractual guaranteed yield he was going to get. But with the fourth one, which was the Indexed Annuity at the seven-year, he didn't know, he just knew he wouldn't pay any fees. He's not going to lose any money, and he might get a little bit better return than the Multi-Year Guarantee Annuity because that's what it's designed to do: a CD type, Multi-Year Guarantee AnnuitY type return.

So, Indexed Annuity versus Multi-Year Guarantee Annuities, I think it really comes down to the duration that you want to lock in. At the time of this blog, and just looking at basic yield curve analysis, five years is the sweet spot. The companies are really not rewarding you for locking in longer than that, but they're both great products. They both fit from a principal protection.

Remember, I look at the PILL analogy. I came up with principal protection, income for life, legacy, and long-term care. They both fall under the P for principal protection. Neither will get market-type returns. But I think they fit in the part of your portfolio for principal protection that you want a yield. And remember, with Indexed Annuities, if you want a guaranteed income in the future, you can attach an Income Rider. Again, with MYGAs and Index Annuities, I've written books on both. You can download them for free. You can get quotes on both at my site. You can go to the live MYGA feed. You can also request an Indexed Annuity quote standalone or an Indexed Annuity with an Income Rider quote. And we will send that to you under no obligation, no cost. You can run it 24/7.

Hey, I appreciate you joining me. I'll see you on the next Stan The Annuity Man blog!

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.