There are many types of annuity products to consider; immediate, fixed, multi-year guarantee, fixed indexed, and variable just to name a few.  While all annuities have the ability to "annuitize" into an income stream that is guaranteed for the lifetime of the annuitant, many annuities are simply used as a deferred savings vehicle.  In a low interest-rate environment, annuities (other than variable), have the ability to provide principal protection plus higher growth potential than most bank products.  Also, most annuities (other than variable) do not charge any type of fee within the product unless a specific rider enhancement is desired.  Two very popular annuity options are multi-year guarantee and fixed indexed - let's look at the details of each.

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Multi-Year Guarantee Annuities (MYGAs)

Multi-Year Guaranteed Annuities have become increasingly popular as bank CD rates have plummeted to all time lows.  MYGAs are fixed annuity contracts issued by insurance companies.

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MYGAs are very similar to bank CDs in that they are both used as vehicles to increase savings, both are considered low to no-risk and will likewise guarantee a specific interest rate for a specific contract’s term or time period. 

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MYGA’s compare very favorably to bank CDs and have some distinct advantages:

• Tax Savings – Taxes are deferred on MYGAs. You do not pay taxes until the interest is withdrawn. This allows interest to be accumulated on the entire principle over the contract term. Earnings on bank CDs are taxable in the year the interest is earned, even if you don’t withdraw your money.

• Higher Interest Rates – Typically MYGAs offer higher interest rates than their CD counterparts.

• Liquidity – If you need access to CD funds prior to maturity date, you will be assessed an interest penalty. Some MYGAs allow for penalty-free interest withdrawals and in some cases up to 10% annually. Also, some MYGAs do not allow for withdrawals until the end of the term.

• Death Settlement – If the annuitant should pass away, an MYGA will pay your beneficiary directly, similar to a life contract, outside of your will or probate.  This can be a significant advantage to estate planning.

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Disadvantage of MYGAs:  The surrender charges for excess withdrawals prior to the end of the stated term can be high, so it is important to maintain adequate external liquidity in order to minimize this risk.

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What is a Fixed Indexed Annuity (FIAs)?

FIAs are insurance contracts that tie your interest rate to the growth of a major index, such as the S&P 500. These products are NOT directly invested in the market. However, market performance is used for interest calculations. As the S&P rises, the insurance company credits your account with interest, up to a pre-determined cap or participation rate – the better the market performance, the higher your interest. When the S&P falls, the insurance company protects your principal against loss. You will NEVER lose your principal, bonus or any prior interest credits based on poor market conditions and thus NEVER have to make up for past losses. You get to share in the upside of market gains with the guarantee you’ll never lose your principal.

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Most FIAs products have no sales loads or fees except for certain enhancement riders that may be desirable to certain clients.

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FIAs have several advantages:

• Safety of principal and ALL interest gains (no market risks)

• Tax-deferred interest growth

• Death benefit paid directly to the beneficiary, avoiding probate

• Potential for higher interest as compared to bank CD rates

• Typically no sales loads or fees for the life of the contract (except for certain optional riders)

• Turn accumulation into lifetime income if desired

• Typically  0% - 10% penalty free withdrawals after first contract year

• Never worry about a market downturn ever again