So if you're not familiar with MYGAs, let me go through it quickly. Multi-year guarantee annuity, that's what MYGA stands for. It's the annuity industry's version of a CD. It's very simple; there are no moving parts, there are no market attachments, and you're going to get a guaranteed interest rate for a specific period that you choose. In most cases, the difference between a CD, and an MYGA is in a non-IRA account, MYGA interest compounds, tax-deferred. There are some simple interest ones out there, but most of them are compound interest products where you do not have to pay taxes on that interest on an annual basis like you would with a CD in a non-IRA setting. That doesn't make MYGAs better than CDs; in fact, the backing of CDs is the best coverage on the planet.
A multi-year guarantee annuity should be purchased for the claims-paying ability of the carrier. There are state guarantee funds that back them up to a certain level, but you should always, and primarily, look at the claims-paying ability. So I get the question all the time, "How far out should I lock in the MYGA?" Currently, I'm telling people five years is kind of the max. Can you go farther than that? Yes, you can lock in a 10-year MYGA, a 10-year annual guaranteed rate. However, what we're seeing is that the carriers are not rewarding you for locking your money up further than that. I just call it fundamental yield curve analysis.
Sometimes, in a laddering standpoint where someone says, "Hey, I want to ladder $400,000," we might do a three-year, a four-year, a five-year, and then a seven-year MYGA, just as part of that ladder. But typically, as a standalone, I wouldn't want you to buy the seven-year just because it's longer duration. Where the sweet spot is from a short-term duration, if you said, "Stan, I want a lot of choices, but I want a short-term duration," that's the three-year MYGA. In the three-year MYGA, many carriers are offering excellent rates, so you're going to lock it in for three years and get an annual interest rate.
So what are the surrender charges on an MYGA? Let's say, for instance, you bought a five-year MYGA; typically, most five-year MYGAs are 9%, 8%, 7%, 6%, 5%, declining over those years of how long you're holding it. Now, that doesn't hold across the board, but the majority are like that. The bottom line with surrender charges with MYGAs is that they're predatory, challenging, and high because you're locking in that interest rate contractually. What the annuity company doesn't want you to do, because they're contractually guaranteed that interest rate, is they don't want you to pivot. You have to know what you're buying and understand the policy. The bottom line is you have to deal with somebody, me, that fully understands these products, that deals daily with these companies, and that will make sure that precisely what you want to happen happens.
In addition, you have to understand is that these rates change and often they don't give us a heads up when they change. The only way to lock in an MYGA rate is with an application. And that's not a sales pitch. You will have to go through the application process where the annuity company has to issue a policy number. Once that policy number is issued, that rate is locked in, and then you have to get the money to the carrier at a specific period.
Now, once the MYGA is issued, you’re going to get a physical policy, in most cases, not all cases, but most in cases. Because of COVID and other circumstances, some companies are sending digital if you want a digital-type policy. But most of the time, I'm going to get the policy, review it for accuracy, then overnight it to you. Once you receive it, you have a free look period, which I'm going to tell you right now; is one of the best things the annuity industry has. Regardless of the annuity type that you buy, there's a free look period, which means that you don't even have to give a reason, you can get your money back if you contact your trusted agent or the carrier.
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.