Multi-year guarantee annuities: An alternative to CDs: OPINION
August 9, 2018 by Elliot Raphaelson, Tribune Content Agency
I have written previously that there are some worthwhile annuities that don’t involve high commissions. A multi-year guarantee annuity (MYGA) falls into this category. It is also known as a fixed-rate annuity. Typically, they are purchased with a single premium amount. You can look at this product as a certificate of deposit with tax deferral.
If your time horizon is more than two years, consider purchasing a MYGA. Similar to CDs, surrender charges apply if you take your money out before the contract period ends. However, most MYGAs allow you to take out 10 percent of the funds penalty free if you need liquidity.
Naturally, before you purchase a MYGA, make sure you understand the regulations regarding penalty-free withdrawals. You also must understand whether the MYGA will automatically renew, which would restart the surrender charges. It is also important for you to understand that some guarantee periods don’t match up with the surrender periods. Don’t purchase any MYGA without fully understanding the guarantees, the surrender charges and automatic renewal rules.
More than 30 companies offer this product, so your financial adviser should be able to obtain the best rates for you by contacting several companies.
The major advantage the MYGA has over the CD is tax deferral. With a CD that is not in an IRA or other retirement account, taxes have to be paid annually on the interest earned.
Most investors know that the Fed in the last few years has been regularly increasing short-term interest rates. Nobody knows when that trend will change. Accordingly, it makes sense to consider a laddering approach, in which you can ladder durations over, say, three or five years to take advantage of increasing rates. If your time frame is three years or more, then consider an MYGA over a CD in order to obtain a higher interest rate.
Naturally, you should consider safety when you compare MYGAs to CDs. There is no question that CDs are very safe because of Federal Deposit Insurance Corporation (FDIC) insurance. MYGAs are regulated at the state level, and if the carrier undergoes financial problems, then it is up to the state guarantee fund to protect the investor. You should consider only carriers with the highest ratings. Your representative should use what is known as COMDEX rankings. These ratings are based on the four major rating services — A.M. Best, Moody’s, Standard & Poor’s and Fitch. Make sure your carrier has a high quality rating.
All deferred annuities, including MYGAs, can be converted into an income stream by annuitizing the contract. Accordingly, at your option, you can convert your MYGA into a lifetime income stream by purchasing a single premium annuity (SPIA), which I discussed in a recent column.
Even if you purchase a relatively short-term MYGA, such as three years, at the end of the term, according to IRS rules, you can transfer a non-qualified annuity, such as the MYGA, to another non-qualified annuity. This transfer is a non-taxable event, and accordingly you would be postponing a tax liability. This can be a useful option if you have no need for the money then.
Most MYGAs offer the accumulation value at the time of your death. It is important for you to understand how the benefit is contractually calculated. Some companies do not waive the surrender penalty at death. Consider only companies that do waive this penalty.
The beneficiaries you specify will receive a lump sum from your MYGA when you die. If your beneficiaries would rather receive payments over a period of years rather than a lump sum, you can ask your agent to structure a policy that will accomplish this. You can change the beneficiaries whenever you choose.
(c) 2018 ELLIOT RAPHAELSON. DISTRIBUTED BY TRIBUNE CONTENT AGENCY, LLC.
