What Is a Multi-Year Guaranteed Annuity?

Hi, this is Stan The Annuity Man. Today's topic is what is a Multi-Year Guarantee Annuity, which is very important because you're not going to hear about this at the bad chicken dinner seminar. Why? Because they're very simplistic with commissions that are very, very low, which means it's good for you.

We will cover a lot about Multi-Year Guarantee Annuities today, so hang in there with me. I'll dive into what is a Multi-Year Guarantee Annuity, how does it work, and what does it solve for? Also, like all annuity types, there are benefits and limitations. We're going to talk about the benefits and limitations of Multi-Year Guarantee Annuities, also called MYGAs, M-Y-G-A-S. I'm going to tell you where to go to look for the best quotes for your specific state, and then I'm going to tell you where it fits in your portfolio, if at all. After this, you'll understand that, and in the end, I've got a surprise for you and a gift that you need to get.

What Are MYGAs?

What is a Multi-Year Guarantee Annuity? Here's what it is. It's the annuity industry's version of a CD. If you understand a CD, you give the bank money, and then they hold onto it for a specific period of time, which you dictate. Then, they're going to pay an annual interest rate. That's a Multi-Year Guarantee Annuity. You choose a specific period of time, and there's a specific interest rate paid annually, not attached to the market, that you get, just like a CD.

CDs and MYGAs are pretty much the same product. The only difference between the two is that you have to pay taxes on the interest from CDs in a non-IRA account. In a non-IRA account, interest on Multi-Year Guarantee Annuities grows tax-deferred. That doesn't make them better; it just makes them different.

What Do They Solve For?

What does a Multi-Year Guarantee Annuity solve for? Principal protection. Annuities solve for four things, and the acronym is PILL. P stands for principal protection, I stands for income for life, L is for legacy, the other L is for long-term care. The P part, principal protection. That's what Multi-Year Guarantee Annuities solve for. Now, people use them to peel off the interest, your guaranteed annual interest, for a specific period of time that you choose. Some people like peeling off that interest and using that as income, but not all Multi-Year Guarantee Annuities allow you to take interest out. Some do, some don't. If you're looking at those Multi-Year Guarantee Annuities for you, and that's important, you need to let me know so we can find those specific ones that allow you to peel off interest so you can take advantage of that.

What Are the Benefits?

What are the benefits of Multi-Year Guarantee Annuities? It's pretty obvious; you're not going to lose any money. It's principal protection. You have a guaranteed annual interest rate return that's contractual. You can use it inside of an IRA. You can use it outside of an IRA. Inside of an IRA, it's just guaranteed interest. Outside of an IRA, the interest grows and compounds tax deferred, separating it from CDs.

Laddering MYGAs

One of the benefits of Multi-Year Guarantee Annuities is that you can ladder them. A recent client said, "I'm trying to time interest rates." Please don't time interest rates because you can't. The way to combat that is to ladder Multi-Year Guarantee Annuities. Now how does that work? Let's say you have $300,000. I'm just using an example. You buy $100,000 for a three-year duration, and you buy $100,000 for a four-year duration. Then you buy a $100,000 for a five-year duration. What have you done?

Every year, starting in year three, money comes due, and hopefully, we can roll that to another annuity with a higher rate. Also, with Multi-Year Guarantee Annuities, you can transfer from one annuity to another outside of an IRA without it being a taxable event. You can keep rolling them and having the interest deferring. That's a benefit as well.

Taxes

Now we're talking about taxes on Multi-Year Guarantee Annuities. The benefit is that you're deferring taxes when you're using a non-IRA account. When that interest grows, CDs, you have to pay taxes on that interest every year. Understand that eventually, when you do take money out of that Multi-Year Guarantee Annuity, you will have to pay taxes on that at last and first out, gains first, at ordinary income levels.

The Limitations

Let's talk about the limitations of Multi-Year Guarantee Annuities. Of course, all annuities have limitations and benefits. Multi-Year Guarantee Annuities have limitations. Let's talk about them.

Number one, the surrender charges are very, very high. Meaning that if you bought a five-year, guaranteed Multi-Year Guarantee Annuity, MYGA, if you got out in year three said, you know, "Stan, I don't want to do that anymore, send me the money." Those surrender charges are high. If you hold it to the duration, obviously, there are no surrender charges, but that's a limitation.

The other limitation is it is backed by the carrier. FDIC backs CDs, which is great. That's the best coverage of all time. With Multi-Year Guarantee Annuities, it's the Claims Paying Ability of the carrier. Now, yes, state guaranty funds back each policy up to a certain point, but you really need to decide on the carrier's Claims Paying Ability. The other limitation is that not all carriers offer Multi-Year Guarantee Annuities. You might have a carrier in mind that you'd really want to do business with; they might not even offer that product type, but many do.

CDs vs. MYGAs

Let's go over the differences, once again, on Multi-Year Guarantee Annuities and CDs, Certificates of Deposits that you get at the bank. They're the same product in essence. You're getting a guaranteed interest rate for a specific period of time. The difference primarily is how that interest is taxed in a non-IRA account. Inside of an IRA, a traditional IRA, CDs, and MYGAs work the same. You're getting a guaranteed interest rate for a specific period of time. Still, outside of an IRA in a non-qualified type account, the interest on Multi-Year Guarantee Annuities is only taxed once you take the money out. It's growing and compounding tax deferred, whereas, with the CD, you have to pay taxes on that interest every year.

The other main difference is the insurance behind it. What's the guarantee? With CDs, you have FDIC, the federal government is behind it 100%, which is the safest backing and guarantees available. With Multi-Year Guarantee Annuities and all Fixed Annuities are regulated at the state level. There's a state guaranty fund that backs carriers up to a certain point. If you said which one's better, the backing of the CD is better. When you buy a Multi-Year Guarantee Annuity, you're buying it for the Claims Paying Ability of that carrier.

Locking in a Rate

How long can you lock in a rate with Multi-Year Guarantee Annuities? It really depends on the interest rate environment that's out there. In the past, they were as short as one year in duration. Right now, at the time of this blog, three years is the shortest. You can go as far out as 10 years. Some will allow you to go farther out than 10, but you don't need to lock in that long unless there's a specific thing that you're trying to solve for. I say five years is probably a good range, five to seven years.

Where Are the Best Rates?

Where do you find the best rates for Multi-Year Guarantee Annuities? Remember that Fixed Annuities are regulated at the state level. Each state has a different approval list of Multi-Year Guarantee Annuities for your state. Some are different. New York is different from Florida, which is different from Texas and California. Now, you can go to The Annuity Man; we have a list where you can shop at your leisure, and you can filter your state and the duration that you're interested in. It'll list the top Multi-Year Guarantee Annuities for your state, approved in your state, and list them from the highest yield to the lowest. It'll also show the carrier rating to base your decision on the claims. That's how you find the best rates for your state: The Annuity Man .

Where Do They Fit in Your Portfolio?

Where do Multi-Year Guarantee Annuities fit in your portfolio? Principal protection. If you're buying CDs, treasuries, or have some money market or AAA municipal bonds, principal protection. If that's what you're looking for with an interest rate, then Multi-Year Guarantee Annuities should fit well in your portfolio whether it's an IRA or a non-IRA account. You're looking for guarantees. You can choose the duration and then the yield will be guaranteed contractually for that duration. A couple of other places it fits in with your portfolio. Obviously, it's a safe money principal-protected strategy. Still, with some Multi-Year Guarantee Annuities, you can peel off the interest so you can actually get a little bit of income while still protecting that principal.

To further your educational Multi-Year Guarantee Annuities, which is important, you need to know everything about them. I've written a Multi-Year Guarantee Annuity owner's manual that you can download for free. You can download all 6 of my owner's manuals with no obligation. And with that, 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.