What is a multi-year guaranteed annuity (MYGA)?

What is a multi-year guaranteed annuity (MYGA)?

A MYGA (pronounced my-guh), is a simple, secure, tax-deferred retirement savings tool offered by insurance companies that provides steady, guaranteed growth. Also known as fixed annuities, fixed deferred annuities, or fixed rate annuities, MYGAs have been growing in market share in recent years, largely as a result of the strong rate environment.

When people hear the word “annuity,” they often think of income annuities, which provide a guaranteed stream of income similar to a pension or social security. However, MYGAs are fundamentally different and function more similarly to CDs in an investment portfolio. MYGAs earn a fixed, predetermined rate of guaranteed interest over a specific time period and offer complete principal protection – meaning, they will not go down in value unless funds are withdrawn. On top of that, the interest earned in a MYGA is not taxed until funds are withdrawn. As a result, MYGAs are often used as an accumulation vehicle or as a fixed income replacement within client portfolios. 

How do MYGAs work?

Like all annuities, a MYGA is a contract between an investor and an insurance company. After signing the contract, the investor transfers funds to the insurance company, at which point the MYGA is effective.

All MYGAs have an initial term, which commonly ranges from two to seven years. During the initial term, a client will earn a predetermined, guaranteed interest rate, growing the contract value each day. MYGAs provide complete principal protection; the value of a MYGA does not change in response to changes in the market or interest rate environment, but only in the case where funds are withdrawn. 

While MYGAs are meant to be held for the entirety of the contractual term, investors can often withdraw 10% of their funds each year, penalty free. If the investor wants to withdraw more than the penalty-free amount during the initial term, the insurance company will likely impose a withdrawal charge and/or a Market Value Adjustment (MVA) on withdrawals.

At the end of the initial term, the investor will have several options to choose from. 

1. Stay in an annuity
If clients would like to keep their money in an annuity contract, they can:

• Remain in the existing contract for an additional one year with a new guaranteed rate, which may be lower than the initial rate. During this time, the money will be fully accessible – there will be no withdrawal charges or market value adjustments. Each year, the guaranteed rate will reset for another one year period.
• Remain in the existing contract, but renew into another multi-year term. This will be similar to purchasing a new MYGA with a new guaranteed interest rate, withdrawal charge schedule, and MVA, all applicable for the new multi-year term. Guaranteed interest rates may be lower or higher than the initial rate, but these rates will generally be higher than a one-year guaranteed rate.
• Replace the existing contract with another annuity, which could be another MYGA or a different product entirely.

In all cases, as long as funds remain in an annuity, assets will continue to grow tax-deferred.

2. Withdraw the funds
Another option is that, at the end of the contract term, the money can be withdrawn from the contract without penalty and used for any other purpose. 

3. Turn it into guaranteed income
Finally, there is an option to annuitize the MYGA contract, turning the contract into guaranteed income for life or another specified period of time. At this point, the client gives up the ability to initiate withdrawals , as the annuity funds have been converted into a stream of income. MYGAs are rarely annuitized.