Multi-year guaranteed annuities, or MYGAs, can appeal to retirement savers seeking predictable returns without exposure to stock market losses. But a competitive interest rate doesn’t necessarily make a MYGA a good deal. The financial strength of the insurer, surrender penalties, renewal provisions and access to cash can matter just as much as the advertised yield.
Sheryl J. Moore, CEO of Wink Inc., a market research firm that tracks annuity and life insurance products and their sales, explained in a recent episode of Decoding Your Money how MYGAs work, how they compare with bank certificates of deposit, and what consumers should investigate before committing their retirement savings.
Below is a transcript of my interview with Sheryl Moore, edited for brevity and clarity.
Why the Highest Annuity Rate May Be Risky
Bob Powell: Suppose you’re comparing two multi-year guaranteed annuities. A smaller insurance company is offering a higher interest rate than a larger insurer. How should consumers decide which one to buy?
Sheryl J. Moore: I think the most important thing that a consumer should consider in the process of purchasing an annuity is who is that insurance company? What do they do with their money? What are their financial-strength ratings? What’s their experience in the annuity market?
Today, it’s pretty commonplace to find smaller insurance companies that haven’t been in the business for a very long time offering very advantageous rates on annuities.
Imagine an iceberg. You just see the top of the iceberg, but there’s all this stuff underneath the water that you don’t see.
The guarantees in this contract are only as good as the claims-paying ability of the insurance company.
That financial-strength piece is very important because the guarantees in an annuity contract are only as good as the claims-paying ability of the insurance company.
If you go with an insurance company that’s been in the market for two months but has an interest rate that’s 1% higher than everybody else’s, you might not care about that higher rate if the insurance company becomes insolvent and is not able to pay its claims.
Powell: So the highest interest rate isn’t necessarily the best deal?
Moore: You’re not necessarily missing out by not getting the highest rate because the financial strength of the insurance company is important.
There are other things to consider. Do they let you take withdrawals via a debit card or a check rather than having to call and request a check?
There are all different types of things you have to take into consideration in terms of what product you’re purchasing and with which insurance company.
What Is a Multi-Year Guaranteed Annuity?
Powell: For someone unfamiliar with MYGAs, what exactly are they, and how do they work?
Moore: There are a lot of different types of annuities, and it can be very hard to discern one from the other.
A multi-year guaranteed annuity, or what we fondly refer to as a MYGA, is the most simplistic type of deferred annuity available for sale today.
MYGAs have a declared interest rate that’s normally guaranteed for three years, five years or seven years, depending on the insurance company and the product.
It’s very simple, relative to other product types, and it’s often like a certificate of deposit, except the taxes are deferred on a MYGA and most other annuities.
It’s a product that’s good for conservative people who are concerned about running out of money in retirement or have concerns about income between when they retire and when they reach full Social Security retirement age.
Powell: Where does a MYGA fit among the different types of annuities?
Moore: I classify annuities as having two camps. One is income annuities, and the other is deferred annuities, which include MYGAs, one-year fixed-rate annuities, indexed annuities, registered index-linked annuities, or RILAs, and variable annuities.
A MYGA is the least controversial, most conservative of the deferred annuities available for sale today.
It’s really great for people who are very conservative.
How MYGAs Compare With Bank CDs
Powell: One of the attractions of a MYGA is that it resembles a CD. What’s the difference in how interest is taxed?
Moore: The taxes on a MYGA are deferred until you begin taking money out.
Powell: What if someone buys a five-year MYGA but needs the money in year two?
Moore: Most deferred annuities, like MYGAs, have a provision that allows you to take out a specified amount of money without being subject to a penalty.
We call it the penalty-free withdrawal amount, and it’s typically anywhere between 5% and 10% of the annuity’s value each year.
But these are intended to be long-term financial instruments. You should have a source of emergency funds in savings or a money market account so you’re not needing to take out money from your annuity within the first year that you own it.
Typically, after year one, you can access up to 10% of your annuity’s value without being subject to surrender penalties.
Powell: MYGAs sometimes offer higher rates than comparable CDs. Where does that additional yield come from?
Moore: When you put $100,000 into an insurance company for a multi-year guaranteed annuity, the insurance company is going to take that $100,000 and turn around and buy bonds.
The insurance company is buying those bonds to make a return off them. It also has to pay the distribution arm, whether that be an insurance agent or a bank, for its part in the annuity process.
Then it has to credit a fair rate to the annuity purchaser.
I’ve tracked one-year and five-year CD rates regularly, and fixed annuity rates have been much more competitive than CD rates, especially since the end of 2022.
Powell: Consumers may receive a MYGA statement that doesn’t show fees. How is the insurance agent compensated?
Moore: In an annuity transaction, three parties have to benefit.
Number one is the insurance company. They’re always going to make their spread. Otherwise, they won’t offer the annuity for sale.
Number two is the distribution arm, whether that’s an insurance agent or a bank. They have to be compensated fairly.
The third party is the purchaser or client.
There aren’t really fees to multi-year guaranteed annuities outside of, say, a surrender charge penalty.
The insurance company is the one that pays the insurance agent in a MYGA transaction.
If you put $100,000 into your MYGA, that’s what your annuity’s value will be worth on day one, assuming it doesn’t have any bonuses.
What Happens When a MYGA’s Guarantee Ends?
Powell: Suppose someone buys a five-year MYGA. What happens when those five years are up?
Moore: Most insurance companies will give you the option to renew your contract.
Let’s say I bought a five-year MYGA, and it’s coming up to the end of its term. The insurance company will probably send me a message asking what I want to do.
I would encourage everyone to do their homework on annuity rates before they respond and say they’d like to renew.
Very frequently, I see insurance companies offering new clients much better rates than somebody who’s renewing the term of an existing annuity with that insurance company.
Powell: Some MYGAs also offer first-year bonuses. How do those work?
Moore: Most MYGAs are sold expressly on what rate is credited. It’s a very commoditized product.
But there are some MYGAs with unique features, including bonuses.
If there’s a 1% bonus on the interest rate and we’re getting 5% for five years, you’ll probably get 6% in year one and then 5% for the other four years.
That would increase your account value after the first anniversary.
But when you’re buying annuities with bonuses, the rates credited to that contract are normally less than other similar products without bonuses.
How Safe Are Insurance Company Guarantees?
Powell: CDs have FDIC insurance. What protections do annuity owners have?
Moore: Insurance companies are not backed by the full faith and credit of the United States government. That’s where a certificate of deposit is a little different from an annuity.
Annuities are regulated at the state level. Rather than one central entity for the United States, you’re dealing with 50 different insurance commissioners.
There is a regulatory solution for people who have purchased annuities with companies that may become insolvent.
Annuities have protection in most states up to $250,000, but the process can be complicated if an insurance company starts showing financial distress.
An insurance commissioner may step in to see if the problem can be fixed, whether another insurance company could purchase the insurer or whether a judge needs to become involved.
We have an insurance company right now that’s going through the insolvency process where they do not have enough money to make everyone whole up to $250,000.
There are going to be some contract holders who don’t get all their money back.
It’s especially important to do your due diligence when you’re looking into which insurance companies to do business with.
Powell: How should consumers evaluate an insurance company’s financial strength? Should they look at ratings from Fitch, Moody’s and S&P?
Moore: Those are the ones I would advise using as a benchmark.
But I would also encourage people to look at more information about the insurance company’s assets and liabilities.
There’s software called VitalSigns that can provide financial-strength and financial information for about 500 insurance companies in the United States.
If you’re working with a financial professional who has access to that software, that’s helpful because it provides more than just the ratings.
Should Private Equity Ownership Concern MYGA Buyers?
Powell: A growing share of insurance companies are owned by private equity firms or other asset managers. Does that concern you?
Moore: I’m certainly not an expert on private equity, but I absolutely keep track of insurance companies that have private equity ownership.
In my research, I’ve found that it’s very dangerous to make a blanket statement about all private equity-owned insurance companies.
There are a lot of reasons why people scrutinize those firms over insurance companies that aren’t owned by private equity.
Those companies normally offer products that are much more competitive than the products offered by their non-private equity-owned peers.
My understanding is that private equity is able to invest annuity purchasers’ money to make a much greater return than, say, a mutual insurance company, but that typically means they’re investing in riskier things.
You need to judge the entire transaction in its totality and not just say, “I can get 1% higher with this company, so I’m going with that.”
Powell: Is the National Association of Insurance Commissioners doing enough to address concerns about private credit, offshore entities and insurer investments?
Moore: There are 50 insurance commissioners who work together to try to create regulation that states will embrace.
But I don’t have confidence that they are on the cutting edge in terms of information about these companies and their activities.
Independent insurance agents often don’t have the resources to research insurance companies’ ownership and how they vary from one company to another.
They may know that one company has better rates than another, but they have a lot of research to do to understand why that rate is higher.
Who Should Consider Buying a MYGA?
Powell: What’s the biggest advantage and disadvantage of a MYGA?
Moore: They do well at meeting expectations in terms of the amount of interest they credit.
The downside is that you don’t have access to 100% of your money for the term that you’re purchasing the annuity for.
If it’s a five-year MYGA, you don’t have use of all that money until the end of the five-year period, except for your penalty-free withdrawal amount.
I used to work for an insurance company, and there were people who didn’t realize they had to wait that whole time.
But if you understand those terms upfront and agree to them, it works beautifully.
Powell: Who’s the ideal buyer?
Moore: Someone who says, “I want more than zero, but I’m not willing to take additional risk in order to make sure that’s the case.”
People who’ve owned CDs historically have purchased annuities afterward and said that it was very much like their CD.
For somebody who’s not really financially savvy but wants that guarantee and wants to understand what they’re purchasing, I think a MYGA makes a lot of sense.
Powell: And who shouldn’t buy one?
Moore: I wouldn’t expect somebody who’s a day trader or active in the stock market to say a MYGA is just what they’re looking for.
People who want to maximize their potential for gains may be better suited to another type of annuity, such as a variable annuity.
Related: IRS 2027 retirement limits: 401(k) caps jump while IRA limits freeze again
Can a MYGA Make Sense Inside an IRA?
Powell: What about buying a MYGA inside an IRA? Since an IRA already provides tax deferral, is there any reason to put an annuity inside one?
Moore: There are a lot of people who say you should not put an IRA in an annuity because you’re already getting the preferential tax status of the IRA.
I would argue that if you’re worried about outliving your retirement money, it could still make sense to use an annuity for your IRA because it provides that unique insurance aspect that a certificate of deposit wouldn’t.
Most people don’t understand that an IRA is not a product. It’s just a part of the tax code, and you can use many different instruments to create an IRA.
I think it’s OK to buy the annuity if you’re concerned not only about taxes but also about having a paycheck for life.
How Can Consumers Avoid Annuity Sales Mistakes?
Powell: What should consumers know about the process of buying a MYGA?
Moore: The majority of MYGA sales come through banks.
If you go to the financial institution where you have your checking or savings account and ask whether they offer annuities, there’s a good likelihood they’ll offer annuities from a handful of insurance companies.
But I don’t think it’s a good thing to advise a client to find the highest rate they can get.
I once got called in to intervene with a customer who owned 50 different annuities at banks throughout Iowa.
They were just trying to get the best rates and would drive to every bank.
I thought there had to be an easier way to do this.
Powell: What about excessive annuity exchanges or agents who pressure consumers to move their money?
Moore: If you ever work with a financial professional who’s urging you to hurry up, like this is an urgent thing, and the hairs on the back of your neck are standing up, you need to run.
This is your nest egg. We need to protect it.
Make sure you do your due diligence on the financial professional who’s helping you.
Ask all the questions you have. If there’s any piece of business you haven’t gotten an answer to that you’re satisfied with, and you don’t feel 100% comfortable with that individual, find somebody else.
Powell: The National Association of Insurance Commissioners has a best-interest standard for annuity recommendations. What should consumers understand about it?
Moore: It doesn’t mean the insurance agent helping you make an annuity purchase is looking at all financial services products across the spectrum and saying this annuity is the right thing for you.
It means you have to go through a lengthy fact-finding process with the insurance agent.
After the agent has information about your risk tolerance, assets, investment philosophy and other required factors, the agent has to make the best decision based on that information.
A lot of people don’t want to keep giving more information. They wonder why it’s necessary.
But I encourage people to realize this is a regulation that the agent doesn’t have a choice in. They have to gather this information if you want to purchase the annuity.
What Should Every MYGA Buyer Check?
Powell: What should be on a consumer’s checklist before buying a MYGA?
Moore: First, who’s the insurance company? Who owns that entity, and where is it located?
How long has that company been selling these types of annuities?
Do I feel confident in its ability to offer competitive rates when necessary?
Do I have other means of accessing my money outside the annuity?
How can I get hold of the insurance company if my insurance agent isn’t available?
One thing people don’t think about is that sometimes insurance agents don’t stay in the business. Historically, only 13% of insurance agents are still practicing three years after they got their license.
That’s something to consider.
Powell: What’s the one thing you wish every MYGA buyer knew before making a purchase?
Moore: If they purchased an annuity that had a quarter of 1% less interest than another annuity, they didn’t necessarily get a bad deal.
You need to know you’re not necessarily missing out by not getting the highest rate because the financial strength of the insurance company is important.
There are all different types of things you have to consider when choosing a product and an insurance company.
Powell: And what happens if someone buys a MYGA and then has buyer’s remorse?
Moore: There’s a provision where you can get your money back after purchasing the annuity if you feel like you didn’t get a fair shake or you changed your mind.
Most states have what we call a free-look provision.
I don’t think I’ve ever spoken with a consumer who was aware of that.
Where Can Consumers Learn More About MYGAs?
Powell: Tell our viewers and listeners a little more about your work and where they can find information.
Moore: I head up a third-party market research firm called Wink.
Wink tracks the life insurance and annuity products sold to individuals, as well as their sales.
We track product provisions and credited rates so we can compare them.
I’m someone who’s very personally passionate about annuities and life insurance, but I really don’t care if you buy one.
I want you to have the information you need to make an informed decision about whether they’re the correct purchase for you.
Our website is winkintel.com. We have an Annuities 101 section and a glossary to help consumers understand the terminology before seeking out a financial professional.
I’ve also written books about multi-year guaranteed annuities and indexed annuities, available through mooremarketintelligence.com.
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