Comparing MYGA Interest Rates to SPIA Rates

Recently, one of my team members took a call from a gentleman who wanted to compare Multi-Year Guarantee Annuities, also known as MYGAs, to Single Premium Immediate Annuities, also known as SPIAs.

Now, before we even get started, that’s like comparing apples to oranges. A MYGA is a principal-protected product, while a SPIA is an income product. Two completely different categories.

Remember the PILL acronym. That’s Principal Protection, Income for Life, Legacy, and Long-Term Care. That’s how you determine if you even need an annuity in the first place.

If you don’t need to solve contractually for one or more of those items, then you don’t need an annuity. It’s that simple.

We also break it down into two questions:

What do you want the money to contractually do?
When do you want those contractual guarantees to start?

Now, let’s get back to the call.

The Comparison

The gentleman said, “Stan, the MYGA is offering 5 percent for five years, but another agent told me I can get a 7.2 percent rate on an Immediate Annuity. What’s the truth?”

Here’s the truth.

A Multi-Year Guarantee Annuity’s interest rate is a true, guaranteed interest rate. It’s a principal-protected product with no market attachments, no annual fees, and no moving parts. It’s a fixed rate for a specific period of time.

If you let the interest grow, it compounds tax-deferred. That 5 percent is real yield. Say it again—real yield.

Now, the agent who said 7.2 percent on a SPIA? That’s misleading. The 7.2 percent is not a yield. It’s not an interest rate. It’s simply a numerical reflection of that person’s life expectancy.

Breaking It Down

Here’s the difference.

The MYGA’s 5 percent is true yield. You can peel off the interest or let it accumulate. The principal is never disrupted.

The SPIA’s 7.2 percent represents the payout rate—the income you receive for life. That payout is a combination of principal and interest. It’s not yield, because you’re getting your money back with interest as part of those payments.

The value proposition of a Single Premium Immediate Annuity is simple. You’re transferring the risk to the annuity company. You’re saying, “I think I’m going to live longer than you think I’m going to live.”

If you do, the annuity company is on the hook to keep paying you for as long as you’re breathing.

People ask me all the time, “Stan, what’s the ROI on an Immediate Annuity?”

My answer is always the same: I don’t know until you die. That’s when we’ll know the return on investment.

Apples and Oranges

So, when you see a 5 percent MYGA and a 7.2 percent SPIA, you’re not comparing the same thing. One is yield, the other is a payout rate based on life expectancy.

Be careful out there. Some websites, trying to compete with The Annuity Man (good luck with that), display misleading comparisons. They’ll show a SPIA quote with a percentage next to the monthly payout.

Ignore that. Call them and tell them to stop doing that. Because that number is not yield, it’s not what you’re earning. It’s just a life expectancy calculation.

A SPIA provides guaranteed lifetime income. A MYGA provides a guaranteed interest rate for a set period of time.

Apples and oranges.

The Bottom Line

This is why it’s so important to understand what you’re comparing.

If you want principal protection and predictable growth, look at a Multi-Year Guarantee Annuity. If you want guaranteed lifetime income, look at a Single Premium Immediate Annuity.

You own an annuity for what it will do, not what it might do.

Go to The Annuity Man, check the live MYGA rates for your state, and run SPIA quotes with the same parameters for an apples-to-apples comparison. You’ll see the truth in black and white.

My name is Stan The Annuity Man. See you next time.