Annuity Comparison FIA vs MYGA
I'm glad you joined me today. This is a great topic. We're making annuity comparisons; we’re doing Indexed Annuities, Fixed Index Annuities versus Multi-Year Guarantee Annuities, which are called MYGAs that's FIAs versus MYGAs, the ultimate caged battle. That's it. FIAs versus MYGAs, which do you want? Which one fits? Do they fit? Can I fit? Will they fit into my portfolio? We're going to go through all of that, and I think I just blew out my shoulder, throwing a punch, but I'll do anything for you. I'll lay it on the line for you.
The Background of FIAs
Let's talk about Index Annuities and Multi-Year Guarantee Annuities. A little background on both Index Annuities, called Fixed Index Annuities, FIAs, was developed in 1995 to compete with CD returns. When CD returns were normal, that 2-4 percent range, that's where they are put on the planet for. The returns on Index Annuities are based on a call option on an index; typically, it's the S&P 500. I've done many videos on Index Annuities if you want to dig in further. I've also written owner manuals on Index Annuities and Multi-Year Guarantee Annuities.
Index Annuities are, in my opinion, the most missold and misrepresented product in the annuity world. The pitches sound too good to be true because they are. If any annuity sales pitch sounds too good to be true, it is every single time. There are absolutely no exceptions to that. For whatever reason, Index Annuities can be a high commission product depending on the surrender charge time period.
But Index Annuities have a pretty good couple of one-liners that aren't true. Here they are—the market upside with no downside. Only part of that is true is the no downside part. The market upside part is not true. Or market participation with principal protection. The principal protection is true, the market participants, it's kind of saying, "You're going to get market return." No, you're not. Can you get that maybe one year out of a 10-year contract? Maybe. But the blended returns are 2-4 percent range with Index Annuities. We love Index Annuities when you fully understand what they do, how they work, and realistic return expectations.
We also use them as a cost-effective and efficient delivery system for income riders and income riders, with another one of the books being a future pinch and guarantee. That's done by attaching an income rider to an Index Annuity. There's not one Index Annuity that's better than the other, regardless of what the bad chicken dinner seminar guy said, regardless of what the Saturday morning local radio guy said, regardless of what the banker that shows you one Index Annuity product said, they're commodity products, all annuity products.
Indexed Annuities are not market products; they are life insurance products. They are not securities. They're issued and regulated at the state level, and they're not too good to be true, but they're pretty darn good when you understand them for what they do.
All About MYGAs
Let's talk about Multi-Year Guarantee Annuities. MYGAs, M-Y-G-A-s, that's the annuity industry version of a CD. For a lot of you out there, a CD is a certificate of deposit. If you don't know what that is. A lot of you out there have purchased CDs. You go in the bank, and if you remember the Jimmy Carter days, you could get a 12 percent CD, meaning that you put money in, they're going to pay you a specific percentage every single year for a duration that you choose, whether it's six months, nine months, 12 months, one-year, two-year, three or four-year, five-year. That's a certificate of deposits back by the FDIC, which is the best backing that you can get.
But Multi-Year Guarantee Annuities, an annuity industry version of a CD, are issued by annuity companies. The annuities carriers are backed by the full faith and credit of those annuity carriers. There are state guarantee funds that back them, but never use that as part of your decision. Always base it on the client's paying ability of the annuity company. By the way, the state guarantee fund cannot be used in a sales pitch. No one can say, "Buy this because there is a state guarantee fund." No. But Multi-Year Guarantee Annuities, they are the CD product. They're going to pay a specific percentage for the duration you choose. No annual fees, no moving parts, no market attachment. It is direct; it’s straightforward. You can explain it to a nine-year-old.
Which Is Better?
The question is, which one's better? Well, let's compare them, Index Annuities versus Multi-Year Guarantee Annuities. Let's look at the similarities. They both are CD products that are going to create CD returns. They both have no annual fees if you just buy them as a standalone. There are no annual fees if you buy the Index Annuities without the ink rider. They're both pretty straightforward from that standpoint. You're not going to lose any money with either of them. That's a good thing.
But Indexed Annuity- salespeople typically don't show people Multi-Year Guarantee Annuities because Index Annuities typically have a higher commission than Multi-Year Guarantee Annuities.
Now, all commissions with annuity types are built into the product, as my CEO points out. It's like having the light bill, water bill, and commission is part of the administrative costs. It's built-in. When you put it into $100,000 or whatever, you’ll see that $100,000 go to work for you. Yes, the annuity agent got paid a one-time payment. But the Indexed Annuity side, typically what you're being shown out there, are longer-term surrender-charged products.
Index Annuities have short-term surrender charge products like a five-year. I’ve even seen four-year Index Annuities, but the potential index returns aren't as good as buying the seven-year or 10-year surrender charge product.
With a Multi-Year Guarantee Annuity, you can buy at this taping as a shorter-term as two years. Sometimes in the past, when interest rates were a little better, you could buy a one-year, buy two-year, three-year, four-year, five-year. If your time duration and where you want to lock in is less than five years, then Multi-Year Guarantee Annuities are going to be the better choice for you because the return and yield are guaranteed contractually.
With an Indexed Annuity, that return is not contractually guaranteed. We don't know what the return will be because it's based on a call option, and typically it's a one-year call option. Then, of course, in the Index Annuity world, there are two, three, and four-year call options, five-year call options, but the majority are one-year call options. We just don't know what that return is going to be. If the market goes down, you're not losing any money. If the market goes up, you will get a limited return. Those limitations in the industry are based upon what's called participation rates, caps, and spreads.
But the point is, if the short-term duration is the goal, then MYGAs is your choice. If long-term durations and possibly a future income stream using an income rider are your choice, then Index Annuities work. Can you use Indexed Annuities and Multi-Year Guarantee Annuities together? The answer is yes. Let me give an example. I got a call the other day, and the guy said, "I want to put together a fixed ladder." I said, "Well, do you want multi-year guaranteed annuities or Index Annuities? Because Index Annuities, let's look at both." I explained that the Multi-Year Guarantee Annuity yield is contractual, and the Index Annuity returns are nothing contractual, other than you're not going to lose any money.
We came up with a three-year MYGA, a four-year MYGA, and a five-year MYGA. Then we did a seven-year Indexed Annuity. We had a ladder of 3, 4, 5, and 7. No writers attached to the seven-year. Hopefully, that seven-year gets a little more return than the MYGAs do, but he understood that it might not. But that was the risk of what he was trying to do. But there's no risk to the principal because the principal is protected. But he knew that three out of the four of those trenches knew the exact contractual guaranteed yield he would get. But with the fourth one, which was the Indexed Annuity at the seven-year, he didn't know. He just knew he wasn't going to pay any fees, he's not going to lose any money, and he might get a better return than the Multi-Year Guarantee Annuity because that's what it's designed to do; CD-type, Multi-Year Guarantee Annuity-type return.
Indexed Annuity versus Multi-Year Guarantee Annuities. I think it comes down to the duration you want to lock in at this taping. Look at its basic yield curve analysis; five years is the sweet spot. The companies, they're not rewarding you for locking in and longer than that, but they're both great products. They both fit from principal protection.
Remember, I look at the PILL analogy, I came out with it; principal protection, income for life, legacy, and long-term care. They both fall under the P for principal protection. Neither is going to get market-type returns. But I think in the part of your portfolio for principal protection that you just want a yield, they fit. Remember, with Indexed Annuities, if you want a guaranteed income in the future, you can attach an income writer.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.