There are many factors to consider when selecting a life insurance plan, with various options ranging from a traditional term life insurance policy to private placement insurance and survivorship life insurance.
Many life insurance companies also offer a type of insurance contract known as a fixed annuity, which promises to pay buyers a guaranteed interest rate on contributions. One specific type of policy that can generate significant value is a multi-year guaranteed annuity.
What Is a Multi-Year Guaranteed Annuity?
A multi-year guaranteed annuity, or MYGA, is a fixed annuity with a rate guaranteed across its term. With a MYGA, you will enter into a contract with an insurance company that involves paying them a premium for a guaranteed fixed interest rate on your contributions across a specific time period.
The terms can fall anywhere in the range of one to 10 years but are typically set at 3, 5, or 10 years.
This type of annuity generates value by tying up a sum of money so it can accumulate interest. Individuals can withdraw money from it before its accumulation period has ended, but they may be required to pay surrender fees. However, some providers offer provisions for penalty-free withdrawals that permit them to partially withdraw funds during the surrender period without having to pay a fee.
After the accumulation period has ended, individuals can receive their premium along with the interest it earned. They may also have the option of renewing their contract, although it may come with a different interest rate than the original one in some cases. Some individuals choose to transfer their funds to a different annuity using a 1035 exchange to avoid tax penalties.
Benefits of MYGAs
There are several reasons individuals choose MYGAs over other types of annuities. The main benefit is the guaranteed interest rate across the entire contract term. This means it poses less risk to investors than indexed or variable annuities, whose returns are tied to the performance of the stock market.
It also carries less risk than a traditional fixed annuity, where the guarantee might only cover one part of the contracted term. For example, a traditional fixed annuity purchased with a 10-year term might only see the rate guaranteed during its first five years; with a MYGA, the rate would be guaranteed for the full term.
Another benefit is that the interest earned on MYGAs is tax-deferred. Taxes on growth will not be owed until an investor starts taking distributions. A MYGA can be purchased with qualified or nonqualified funds.
When qualified annuities are purchased through IRAs or other types of tax-advantaged accounts, income taxes are paid on the principal and interest when an individual makes withdrawals; only the interest is taxable on nonqualified annuities.
MYGAs offer investors flexibility through the ability to make partial withdrawals. This allows those who need to pay an unexpected major expense, like a big medical bill, to have the option of taking the money from their MYGA rather than pulling it from an IRA, paying early withdrawal penalties on CDs, or obtaining a 401(k) loan.
While MYGAs do carry fees, they often work out to be lower than those of other types of annuities.
How Are MYGAs Different From CDs?
Although a MYGA may be similar to a certificate of deposit (CD), there are some important differences to be aware of. With a CD, money is stashed away for a specific time period; when it reaches its maturity date, it can either be renewed or withdrawn, along with the interest it has earned. For this reason, it is often compared to a MYGA.
However, CDs impose early withdrawal penalties for taking money out before they mature, while many MYGAs allow partial withdrawals every year without incurring a tax penalty. MYGAs also offer more competitive rates than CDs.
While annuities may carry more fees, their growth is tax deferred; with CDs, taxes must be paid yearly on interest. In addition, CDs are normally issued by banks or brokers, while MYGAs are contracts with insurance companies.
Who Should Get a MYGA?
A MYGA is a particularly good way of generating value for those who are nearing retirement and do not want their investment to be subject to market volatility. Much younger individuals who are several decades away from retiring might find better returns with an IRA or 401(k) plan.
These policies are a good choice for those looking for a potentially safer method of investing for the future than a CD while taking advantage of favorable tax treatment when they start withdrawing the money.
It should not be the sole focus of a retirement plan but can serve a valuable role alongside other investments as part of a comprehensive retirement plan.
Discuss Your Financial Goals With Vector Financial Group
Life insurance packages can add a layer of protection to your finances and help you use tax benefits to your advantage. At Vector Financial Group, our professionals can help you devise a strong financial plan that is tailored to your unique circumstances and incorporates investments such as MYGAs and private placement insurance. Contact us today to schedule an appointment.
