Tips for Buying a MYGA Annuity

A Fixed Deferred MYGA ("Multiyear") Annuity is a tax-favored wealth accumulation contract issued by an insurance company. Its main advantage over a mutual fund or bank Certificate of Deposit is that earnings grow in your account on a tax-deferred basis. This means you pay no income taxes until you withdraw money from the account. Because of this, the value of your account is able to increase more quickly since the entire amount of each year's earnings works to create new earnings. You can fund a deferred annuity with personal savings ("after-tax" or "non-qualified" monies) or with a "rollover" from a qualified account such as an IRA or a lump sum distribution from a qualified pension plan. In this case, there is no tax advantage offered by the deferred annuity over the IRA, since monies in an IRA already grow tax-free.

In addition to compounded tax-deferred earnings, annuities may also offer a high degree of safety. Your premium and earnings are guaranteed by the claims-paying ability of the issuing insurance company. Insurance companies are required by law to set aside assets (known as "reserves") in order to cover the claims of their policyholders. Companies are also regularly monitored by ratings agencies such as A.M. Best, Standard and Poor's, and Moody's. By reviewing the ratings an insurance company receives from the rating agencies you may determine if it is operating on a sound financial footing.

The most common form of MYGA is a Single Premium ("SP") annuity. "SPs" accept a one-time-only deposit and accrue interest until the contract is surrendered or annuitized. A Flexible Premium ("FP") MYGA contract is one which accepts multiple deposits.

Virtually all MYGAs offer the contract holder a high degree of control over his/her investment. At the outset, there is a "right to examine" or "free look" period (10-20 days in most states) which allows you to return the policy for a full refund for any reason. Afterwards, you can cancel the contract at any time, although doing so will likely cause you to incur a surrender charge and also a market-value adjustment (a plus or minus "MVA") charge.

MYGA Interest Rates

The Initial Interest Rate and the length of time for which this rate is guaranteed (called the "Rate Guarantee Period or "RGP") are two of the most important features of a MYG annuity. Most insurance companies credit interest daily, allowing earnings to compound on a basis known as "day of deposit to day of withdrawal."

Some insurance companies offer "bonus" interest rates, which can tack on as much as 5% to the current first-year's interest rate, boosting the yield to 9% or higher. As alluring as these bonus rates may seem, they can also be confusing. Some companies only pay the bonus if you eventually annuitize with that company and take your money in monthly installments over a period of at least 10 years. If you want to withdraw your money in a lump sum, the insurer may retroactively subtract the bonus as well as the interest attributable to that bonus.

In a MYGA annuity, interest is credited at a declared rate for the full RGP. Some policies credit the same interest rate for the duration of the RGP. Other policies credit a bonus rate in the first year of the RGP and a lower rate for the following years. In either case, however, there is no uncertainty about the interest rate that your account will earn.

Expenses

Fixed annuities have no upfront sales charges. It would also be unusual for fixed annuities to charge maintenance fees. Because of this, 100% of your deposit - without any deductions - goes directly to work for you in your account.

Penalty-free Withdrawals and Surrender Fees

Almost all insurance companies let you withdraw interest as it is earned without having to pay a surrender penalty. Many also allow free withdrawals of up to 10% of your contract value (principal plus accumulated earnings) each year. If you want to withdraw more than 10% of your contract value, you are likely to be charged an Early Surrender Penalty. This is assessed as a percentage of the amount that exceeds the Penalty-Free Withdrawal amount. These charges are not the same as the 10% early withdrawal penalty that the IRS imposes when you take funds out of an Single Premium Deferred Annuity (SPDA) before you reach age 59 1/2.

Shopping for the Best Deferred Annuity

It is best to work with an agent that has the ability to comparison shop and find the best annuity that meets your particular needs. You can request a free quote on our website.$

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