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MYGA: The Annuity Industry’s CD

Stan Haithcock
May 13, 2024
MYGA: The Annuity Industry’s CD

Hello, America. Stan The Annuity Man. I'm America's annuity agent, licensed in all 50 states, including the one you're sitting in, which I assume is very beautiful and picturesque. Nod your head.

Today I am wearing a shirt that reads, "I found this humerus." Do you get it? It's a bone. It's a humerus bone. Got it? Hey, enough about that. It's that simple. The simplicity of the shirt is what we're going to be talking about today. The simplicity of Multi-Year Guarantee Annuities and how they work. And, by the way, Multi-Year Guarantee Annuities are the industry's version of a CD, a Certificate of Deposit. So, if you hate all annuities, then I guess you hate all CDs, which is probably not the case. So, with that, let's get into it.

By the way, great story. My mom, 82 years old, is in St. Augustine, Florida. And I don't like doing business with family because when you go to family gatherings, all they talk about is business. So, people are like, "Well, don't you sell your mom MYGAs because she's a CD buyer?" No, because I don't want my mom saying, "Hey, can you help me explain this?" It's a CD, mom. It's a guaranteed interest rate. I love my mom, 82 years old. She attends the bad chicken dinner seminars and eats all the agents' food. I really appreciate that. But should she buy MYGAs? If she weren't my mom, I'd sell her a MYGA. But she's my mom. You don't sell your mom anything. You know better than that.

Breaking It Down

Let's talk about MYGAs and CDs. MYGAs have principal protection. CDs have principal protection. What does that mean? You're not going to lose any money. That's a good thing. Number two, what's the difference? What's the same? Regarding principal protection, it's the same. Duration. You can choose your duration with both. What does that mean, Stan, in English? That means if you want a one-year CD, you can choose it. If you want a three-year MYGA, you can choose it.

Oh, by the way, the difference between these two is that, typically, the shortest term is two years that you can buy. With a CD, I'm assuming you can do three months, six months, or whatever. I mean, you can really do some short-term stuff over here, which is great. I love CDs. I don't sell them, but I love them because they protect your principal, and at this time, that's a good thing. You are able to do that with Multi-Year Guarantee Annuities as well.

Now, what's the difference between the two? Those are kind of the same. Also, no fees. Are there commissions in both? Yes, there are commissions in both. There's no philanthropist out here. I'm getting paid if I sell you one. The banker's getting paid if they sell you a CD, and that's okay. It's built-in and hidden from the client. I'm not sure that's okay, but that's just the way it is. Meaning that if you put $100,000 in a MYGA, you see $100,000 on your statement. But I did get paid a little bit from the company. One time. You don't ever see it. Same thing with a CD. If you put $100,000 in, you will see $100,000 go to work. Did the advisor or banker or broker get paid? Yes, they did. So, no fees. There are commissions on both, but in essence they're pretty much the same product. So, what's the difference?

The Difference

Alrighty then, as Jim Carrey says in the movie, let's look at CDs and MYGAs in different types of accounts and how they perform. First of all, the guarantees are the same. The interest rate guarantees are the same in every single account, right? So, in an IRA, you put a CD in an IRA; you put a Multi-Year Guarantee Annuity in an IRA, and the interest grows tax-deferred on both. In a Roth, and you can put it in a Roth, you can pull out the money anytime. You can take it out tax-free.

But here's the difference. Here's where the rubber meets the road, Ms. Producer. With a CD and a non-IRA, you have to pay taxes on the interest. Taxes, taxes, taxes, annually with a Multi-Year Guarantee Annuity and a non-IRA deferred. Does it mean it's better than a CD? No, it doesn't mean it's better, but there are many people who want guaranteed fixed returns annually but don't want to pay taxes on the interest. Now, are you going to have to pay taxes when you pull it out? Yes, you are, but you can defer them. You can push that tax puck down the ice. Hockey analogy. Now, let's talk about some laddering strategies you can use with CDs and MYGAs.

Laddering Strategies

So, Multi-Year Guarantee Annuities and CDs are kind of the same thing. There are just some issues from the standpoint of which account you use in it. Issues meaning taxation. Remember, in a non-IRA setting, with CDs, you have to pay taxes on the interest annually. And with multi-year guarantee annuities, those taxes are deferred. It doesn't make it better. Just that's the difference. Now, let's look at some laddering strategies. The way that I look at it, I don't sell CDs, but I love them. But if someone said, "Hey, I want to ladder maturities," which people sometimes ladder bonds, and I even ladder income with annuities, but that's a whole other story. But let's say, hey, let's maximize interest rates with a ladder. How would you do that on a five-year? So, let's say someone said, "Okay, I've got half a million dollars." And forget the account type because the account type, whatever the account is, we've already talked about the non-qualified and the IRA and the Roth IRA, but it's $500,000. What I would tell them to do is, "Okay, let's put $100,000 in each tranche," for lack of a better phrase. You have a one-year, a two-year, a three-year, a four-year, a five-year duration. In the one year, you put $100k, two-year you put $100k, et cetera. So, you're splitting up the $500k over this duration time period.

Historically, this is what you would do to maximize interest rates. You'd buy $100,000 CD, $100,000 CD on the two-year, and then the next three tranches would be MYGAs, historically. Would you shop all rates to see who has the best rates in these tranches? Yeah. But historically, CDs win in that short-term duration. And you could even do the ladder differently. You could say, "I want a six-month and a twelve-month," and you could do it any way you want, but you're buying the highest yield. And this is typically how that ladder would look just maximizing duration and yield. This would be a great fixed-rate ladder for a portfolio.

Claims Paying Ability

Let's talk about Claims Paying Ability because that's important. It's important to my mom. She loves FDIC insurance. She doesn't know what it is, but she loves it because she feels warm and fuzzy, and that's all that matters, right? So, CDs are backed by FDIC, Federal Deposit Insurance Corporation. And the tinfoil hat people out there say, "But Stan, the government's in debt and blah, blah, blah, and dah, dah, dah." Trust me, that's the best coverage on the planet.

State Guaranty Fund

Now, how are Multi-Year Guarantee Annuities covered? By the state guaranty fund. Each state has a guarantee fund. I'm going to give you the address of where to go to find it because each state is different, of course. There it is, There, you can pull up your specific state of residence. There'll be some frequently asked questions, and they list them as FAQs. Then, you can pull up the coverage for your specific state. And it's per policy, per owner, per company, but that's the way to look at it. And typically, you'll see anywhere from $100,000 coverage up to $250,000 or $300,000 coverage for Multi-Year Guarantee Annuities.

But in my perfect world of unicorns chasing the butterflies, annuity unicorns chasing annuity butterflies, always buy your Multi-Year Guarantee Annuity based primarily on the Claims Paying Ability of the issuing carrier, not this state guaranty fund. In fact, the industry frowns upon it very severely. They do not like agents saying, "Buy this Multi-Year Guarantee Annuity because there's a state guaranty fund." And they certainly don't want the agents saying, "Buy the Multi-Year Guarantee Annuity because the state guaranty funds like FDIC." It's not. FDIC is better. It doesn't mean CDs are better, but it is better coverage in my opinion.

All right, we are getting ready to close this out. I've written a Multi-Year Guarantee Annuity Owner's Manual, which you can download for free. No strings attached. You can not only read and download the Multi-Year Guarantee book, but you can also download the other five Annuity Owner's Manuals. Thank you for reading along with me today, and I'll see you on the following Stan The Annuity Man blog.

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.

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