MYGA Multi-Year Guarantee Annuities

Read transcript

Stan: Hi, I’m Stan The Annuity Man.

Gary: And I’m Gary from Cannex.

Stan: We’re talking about MYGAs, or Multi-Year Guarantee Annuities. In English, that means Fixed Rate Annuities. It’s the annuity industry version of a CD. People shouldn’t make it anymore complex than that.

Gary: Right.

Stan: So, these are pretty popular out there, for what reason? If someone asks, “Hey, Stan, should I buy a CD, or should I buy a Multi-Year Guarantee Annuity?” Explain the difference?

Gary: Well, I think, with a CD, the sweet spot’s probably one to three years.

Stan: Got it.

Gary: With a bank, you get a pretty decent rate for that. With these MYGA products , getting your rates equal or above a CD within in the annuity, you’re probably looking more, like, five years, maybe into seven, as far as hitting that sweet spot.

Stan: Currently the Multi-Year Guarantee Annuity is a commodity product, which means it is necessary to shop all carriers. The shortest duration that you can get right now is a three-year Fixed Rate Annuity. In the past they’ve offered two years, but right now (fall of 2017) it’s a three year Fixed Rate Annuity. Most people are stopping the length at five years, because that’s where the value is right now. You get a guaranteed contractual yield for a specific term, but there’s an important difference between a MYGA and a CD. If you buy a CD in a non-IRA account, or non-qualified account as they call them, you have to pay taxes on the interest every year. You do not have to pay taxes on the interest on a Multi-Year Guarantee Annuity, it compounds tax deferred. Yes, eventually the IRS will tap you on the shoulder for payment, when you take the money out.

Gary: Right.

Stan: But as long as you defer it, it compounds tax deferred, and I think that is a key difference between CDs and Multi-Year Guarantee Annuities. That doesn’t mean it’s better than a CD, but what we do find is that if you place side by side a five-year CD and a five-year Multi-Year Guarantee Annuity, the Multi-Year Guarantee Annuity is going to beat it, every single time.

Gary: Right.

Stan: So what are the limitations that you hear all the time about MYGAs?

Gary: Well, essentially, there are some high, some rigor charges. Similar to a bank CD, if you change your mind before three years, you’re going to pay a penalty. Well, you’re going to pay some penalties with MYGAs too, especially if you don’t push that term out to five years, even seven years.

Stan: Right.

Gary: There’s enough time for you to potentially change your mind in five or seven years.

Stan: Another limitation some of them have is limited liquidity, or even no liquidity. Some allow you to peel off the interest, some allow you to take 10% out every year. Those rules are really dependent on what state you live in, and what products are approved in that state; not all states hold the same rules. Fixed Rate Annuities are not all the same. Interestingly enough, there are really only five places on the planet where money is safe, in my opinion. People argue with me all the time.

United States Treasuries. Number, AAA municipal bonds.-Gary, you said the other day, “We have those still?” They are they out there. CDs Money markets Fixed Rate Annuities.

Again: Treasuries, AAA Muni, CDs, money markets, Fixed Annuities.

Gary: Right.

Stan: These are for people who say, “You know what? I don’t want to lose a dime, Stan. I don’t want to lose any more money. I want my principal to be intact. I don’t care what the market does. I don’t care what the politics does. I don’t care what the global stuff does. I want to protect my principal.” That’s where Multi-Year Guarantee Annuities come in, right?

Gary: Absolutely.

Stan: Let’s talk about getting income from a Multi-Year Guarantee Annuity. Yes, you can peel off the interest with a lot of them, that’s income. What’s another way to look at Multi-Year Guarantee Annuities for income?

Gary: Sure, well, as with a growth product, You have the option to annuitize the contract, meaning when you cash out, you can move it into an Immediate Income Annuity. Today, there are guaranteed benefit riders, or withdrawal benefit riders, showing up on some of these products, so you can still have access to your money, if you want to start income. That’s a recently emerging possibility right now. There are other options available to turn that money into income.

Stan: You can use them in an IRA, or you can use them in a non-IRA. Obviously, if it’s in an IRA, you’re just looking for yield, because an IRA is already tax deferred. Using a MYGA in a non-IRA setting, the money’s going to compound, while tax deferring that interest.

Buy a five-year Multi-Year Guarantee Annuity, or Fixed Rate Annuity, and at the end of the term, you have three choices.

You can say, “Hey, send me a check, Stan. Send me a check for the whole amount, plus the interest.”

You can transfer it to another annuity, to keep pushing that tax puck down the ice – Hockey analogy… (Gary says, “Like rolling your CD”)

Use it to provide lifetime income. To do that, you can transfer into the Single Premium Immediate Annuity.

This is where Cannex comes in providing the listings of the best rates on five-year Multi-Year Guarantee Annuities. Say I’m at the end of a MYGA term, and I think I want income now. We take the Cannex system, we use a compound interest calculator to find out what the final MYGA amount is, and then go shop for a Single Premium Immediate Annuity.

Cannex is going to quote the world, because that’s what you guys do. You quote the annuity world, and you provide the contractual guarantee amounts available in real time.

Let’s show an example. We’ll use as an example a couple from Texas, Robert and Mary. So our friends from Texas bought a MYGA, and they held it for five years at what rate?

Gary: We’ll say a pretty decent rate out there is 3% today.

Stan: Exactly. That’s kind of where the five-year is. So, we’ll say it compounded at 3% for five years. How much did they put in? We’ll say $100,000. So, what was it yielding?

Gary: Well, after about five years, that $100,000 will go to $116,000.

Stan: That is contractually guaranteed, even if the world ends and everyone’s going crazy, that is still what they’re going to get, right?

Gary: Exactly right.

Stan: Okay, so they have that amount, and are going to go shop now for a Single Premium Immediate Annuity.

Gary: Let’s set this up as a joint contract for Robert and Mary.

Stan: Okay. They’re getting along.

Gary: They’re getting along.

Stan: The marriage is going well.

Gary: Absolutely, so let’s put some cash free fund in there, too, so that they are guaranteed to get all their money back, or their beneficiaries will get their money back.

Stan: Their children, who they really don’t like, are going to get the lump sum if they both die.

Gary: Exactly. So, by putting $116,000 into a Joint Life contract, they’re basically going to get $550 per month, when Robert turns 70.

Stan: Okay, that’s the results we find using Cannex. They rolled that MYGA into a SPIA.

Say they originally bout a DIA instead of a MYGA. They were saying, “We don’t need income right now, but we want to lock in the income in the future,” They could use the exact same process to run a Deferred Income Annuity quote on the Cannex platform to see available payments for the future. Correct?

Gary: Right. They could consider a DIA five years earlier, instead of going into the Fixed Rate Annuity product using that same $100,000 amount.

Stan: If they are planning for future income payments, the choice before them would be: Put $100,000 in a Multi-Year Guarantee Annuity, then at five years, plan to buy an Immediate Annuity, or purchase a DIA to lock in future income payments, with the money cooking at current rates. Maybe they are thinking, “I’m thinking about buying a Deferred Income Annuity now, instead, of a MYGA. What’s the difference in payment levels?”

Gary: Using that same original investment level of $100,000, the DIA comes out at $570 a month, so, you’ve got a play of about $20 a month. There is some flexibility using the MYGA in order to take advantage of the market possibly growing or rates changing upward, based upon that guaranteed compounded 3% growth. It is possible to put it into a SPIA just from the outset, and generate $550 immediate payments. Either put that $100,000 into a DIA, cook it in a MYGA planning to roll it into an Immediate Income Annuity, or just buy a SPIA outright.

Stan: Right.

Gary: Looks like if you let it cook at the insurance company, I’m coming out, kind of around the same place.

Stan: Really, based on what you’re saying, this is the reason you can’t say, “I hate all annuities,” or, “This is the best annuity” You might consider that interest rates could rise in the next five years.

Gary: Right.

Stan: So Roger and Mary buy the Multi-Year Guarantee Annuity, with the hope that interest rates are going to rise by that annuity year five. Then when they shop for that guaranteed income (SPIA or DIA), there is a possibility of a better payout.

Gary: Right.

Stan: I think the key is, with Multi-Year Guarantee Annuities, it’s a good place to park your money. You don’t have to pay taxes on that interest, and hopefully you can attach yourself to higher interest rates at term end. You have options whether it’s moving to another MYGA, if you don’t need income, or shopping for guaranteed income.

So if you love CDs, you can’t say, “I hate annuities,” because we have MYGAs, right? People need to understand that with a CD from a non-IRA account, well, you’re going to pay taxes on that interest. You’re going to have interest on that CD, and you’re going to pay taxes annually.

With a Multi-Year Guarantee Annuity, in a non-IRA setting, the interest compounds and tax on that interest defers. That’s a big deal. It doesn’t mean it’s better than a CD, but it does mean you need to look at MYGAs if your time horizon is three years and out. So, it’s a nice way to park money. You can also transition to income, and shop for a SPIA at the back end.

I really believe this is a great product, and if you’re a CD buyer, you probably should be a MYGA buyer, too. What does Cannex do? Cannex provides the information consumers need about the highest yielding companies out there offering MYGAs. They filter the information for you, based on your state. It’s a great system. What do you want people to understand about MYGAs? What is the take away?

Gary: It’s a very simple product, it’s principal prediction, and like you said, it’s one of the safest places where you can park your money.

Stan: Bingo. I’m Stan The Annuity Man.

Gary: I’m Gary from Cannex, and we’ll catch you next time.