Multi-Year Guaranteed Annuities (MYGA)

What is a MYGA

A MYGA is a contract between a consumer and a life insurance carrier. The consumer pays a single premium. The carrier guarantees a fixed interest rate for a contractually defined term. At the end of the term, the consumer can withdraw the full value, renew into a new term at the then-current rate, take a lifetime income option, or do a 1035 exchange into another annuity tax-free.

MYGAs are regulated as insurance products by each state's department of insurance. They are not registered securities. They do not have prospectuses. Each carrier publishes a product brochure and rate card.

How rates are declared

MYGA rates reflect the carrier's portfolio yield. Life insurance carriers invest premium receipts primarily in investment-grade corporate bonds and government securities. The yield on that portfolio funds the rate offered to consumers. When Treasury yields rise, MYGA rates generally rise. When yields fall, MYGA rates fall.

Carriers publish a rate card that lists the guaranteed rate for each term length. The rate stated at issue is locked for the entire term. Some products use a tiered structure: a higher rate for the first year and a lower rate for years 2 through the end of term. The blended yield disclosed on the brochure should be reviewed when comparing tiered products.

Term length tradeoffs

MYGA terms range from 2 years to 10 years. Longer terms typically pay higher rates. Longer terms also lock the consumer's capital for longer and concentrate exposure to one carrier's financial strength.

• 2 to 3 year terms. Closest to CD-equivalent. Lower rate but high liquidity at maturity.
• 5 year terms. The most common MYGA. Balances rate and lock-up.
• 7 year terms. Modest rate premium. Useful when the consumer expects rates to fall.
• 10 year terms. Highest typical rate. Best for capital that will not be needed for a decade.

Surrender schedule and market value adjustment

A withdrawal beyond the free withdrawal allowance during the term triggers a surrender charge. The surrender charge declines each year and reaches 0% at the end of the term. A typical MYGA surrender schedule on a 5-year contract: 9% in year 1, 8%, 7%, 6%, 5%, then 0%.

Most MYGAs also include a market value adjustment (MVA). The MVA is calculated using the change in a reference interest rate (often a Treasury yield or carrier-specified index) between issue and surrender. If rates have risen since issue, the MVA reduces the surrender value. If rates have fallen, the MVA increases the surrender value. The MVA does not apply at the end of the surrender period or on death benefit payouts.

Free withdrawal provisions

Almost all MYGAs allow a partial withdrawal each year without a surrender charge or MVA. The most common allowance is 10% of the contract value per year, beginning in year 2. Some products allow interest-only withdrawals during year 1. The terms are disclosed on the contract.

Required minimum distributions from a qualified MYGA are typically excluded from any surrender charge even if they exceed the 10% allowance, but this varies by carrier.

MYGA vs certificate of deposit (CD)

MYGA vs Treasury

Treasuries are direct obligations of the U.S. government and are considered the lowest-risk fixed-income instrument available to retail investors. MYGAs are obligations of a single life insurance carrier and are backed by that carrier's portfolio and (within limits) a state guaranty association.

For a buy-and-hold consumer, a 5-year Treasury and a 5-year MYGA produce similar economic outcomes. The MYGA usually pays a higher rate. The Treasury offers market liquidity (it can be sold on a secondary market before maturity; the MYGA can only be surrendered on the carrier's terms). Treasury interest is exempt from state income tax; MYGA interest is not.

Tax treatment

MYGAs are tax-deferred. Interest credited to a non-qualified MYGA is not taxable until withdrawn. Once withdrawn, the gain is taxed as ordinary income, not as long-term capital gains. Withdrawals before age 59½ may be subject to a 10% federal tax penalty in addition to ordinary income tax.

MYGAs can be funded with qualified money (IRA, 401(k), 403(b) rollovers) or non-qualified after-tax money. The 1035 exchange provision allows a non-qualified annuity to be moved to another annuity carrier without triggering tax on the gain at the time of the exchange.

MYGA laddering

A MYGA ladder divides a lump sum across several MYGAs with staggered maturities. Example: $250,000 split into five $50,000 MYGAs with terms of 2, 3, 5, 7, and 10 years. Each year (or every other year), a tranche matures and can be redeployed at the then-current rate or used for spending.

The ladder smooths out reinvestment risk. If rates rise after the first MYGA is purchased, subsequent maturities can be reinvested at higher rates. If rates fall, the locked-in tranches preserve the higher rate. Ladder design is the same in spirit as a CD or bond ladder, with the MYGA-specific differences in liquidity and tax treatment.

When a MYGA fits

• The consumer wants a guaranteed rate of return for a defined period.
• The consumer is comfortable locking up the principal for the chosen term.
• The consumer values tax deferral over the term length.
• The consumer wants higher yield than CDs are paying.
• The consumer is funding retirement income on a defined horizon.

When a MYGA does not fit

• The consumer may need full access to the principal during the term.
• The consumer is in a low tax bracket where tax deferral provides little benefit.
• The consumer has $100K+ at a single carrier and would exceed the state guaranty association coverage.
• The consumer wants market upside.

Frequently asked questions

Are MYGAs FDIC-insured?

No. MYGAs are not bank products. They are not FDIC-insured. They are obligations of the issuing life insurance carrier, backed (within limits) by the state guaranty association of the state where the policy is issued. Coverage limits vary by state, typically between $100,000 and $500,000.

What happens at the end of the term?

The carrier provides a window (often 30 days) during which the consumer can withdraw the full value without a surrender charge, renew the contract into a new term at the current rate, take a lifetime income option, or do a 1035 exchange into another annuity tax-free. If no action is taken, most contracts default to a renewal at the carrier's current renewal rate, which is often lower than the rate available at a new issue.

Can the rate change during the term?

No. The MYGA rate is fixed for the entire term. The carrier cannot reduce it.

What is the difference between a MYGA and a traditional fixed annuity?

A traditional fixed annuity has a minimum guaranteed rate and a current declared rate that the carrier can change annually. A MYGA guarantees the same declared rate for the entire term. MYGA is a subset of fixed annuity products.

Can I add money to a MYGA after the initial premium?

Most MYGAs are single premium products and do not accept additional contributions. Some flexible-premium MYGAs exist but are uncommon.

Sources

• National Association of Insurance Commissioners
• State Guaranty Association coverage limits, published by NOLHGA
• Federal Reserve Economic Data (FRED)
• FDIC, certificate of deposit rate data
• Carrier rate cards (proprietary, updated weekly by AnnuityMatchPro)

Related

• Fixed Indexed Annuities, an alternative when index-linked growth is wanted
• Deferred Annuity Calculator, project tax-deferred growth at a guaranteed rate
• Glossary: Market Value Adjustment
• Glossary: Surrender Charge
• Glossary: 1035 Exchange