Best MYGA Annuities: Rates and Key Features You Need to Consider

Quick Article Guide

Here’s what we'll cover in this post:

• 1. The Interest Rate Structure
• 2. Duration
• 3. Liquidity
• 4.Carrier Rating
• 5. Surrender Charges and Value Adjustments
• 6. Banding
• 7. End of the Term Provisions
• Conclusion

1. The Interest Rate Structure

When it comes to evaluating an MYGA, the interest rate structure is of paramount importance. This is the feature that investors pay the most attention to, as it determines the dollars returned at the end of the guarantee period. However, it's important to note that the interest rate quoted may not always be as straightforward as it seems.

While most carriers quote a compound interest rate that makes it easy to compare products, some carriers may advertise a simple interest rate.

For instance, the fixed five-year option for iBexis Life & Annuity Company is currently 5.35%. While iBexis advertises this as an annual simple interest rate, the actual 'yield to maturity’ is 4.86%. This 'yield to maturity 'figure is crucial, as it provides a more accurate picture of the actual return on the investment than the advertised interest rate.

Sagicor’s Max MYGA 5 has a compound interest rate of 5.50%.  The “yield to maturity” or quoted rate is also 5.50%

Some products may have higher first-year rates and lower subsequent rates throughout the remainder of the term.

For example, the Protective Life Balance Annuity 5 MYGA credits 6.60% in the first year and 4.0% for the remaining four years. The yield to maturity is 4.51%.

Other products may have a “Step Rate” feature that increases yearly.

The MassMutual Ascend Life SecureGain 5 rate starts at 4.0% in the first year and increases by 0.10% for the remaining four years. The yield to maturity is 4.25%.

You will want to know the rate earned yearly when planning income needs.

2. Duration

Most Multi-Year Guaranteed Annuities (MYGAs) offer guaranteed rate terms ranging from three to ten years, with some options as short as two years or as long as 20 years. The rates for these terms generally reflect the interest rate yield curve of bonds with equal credit quality but varying maturity dates.

Understanding how the yield curve impacts MYGA rates can help you make an informed decision:

• Normal Yield Curve: Characterized by lower yields for shorter maturities and higher yields for longer terms, this is the most common scenario. MYGA rates typically follow this pattern, with longer terms offering more competitive rates.
• Inverted Yield Curve: In this scenario, short-term interest rates exceed long-term rates, often signaling a potential economic downturn. MYGAs with shorter terms may offer higher rates in this environment.
• Flat Yield Curve: A flat curve, which occurs during economic uncertainty, produces similar yields across all maturities. This can result in minimal rate differences between short- and long-term MYGA products.

By considering how yield curves influence MYGA rates, you can better align your annuity choices with your financial goals and the current economic climate.

At the end of December 2024, the yield curve was relatively flat. The highest MYGA 2-year term rates are 4.90%, the 3-year and 4-year rates are 5.20%, the 5-year rate is 5.50%, the 6-year and 7-year rates are 5.45%, the 8-year rate is 5.20%, the 9-year rate is 5.10%, the ten-year rate is 5.15%, and the 20-year rate is 4.15%.

When interest rates are expected to rise, clients are reluctant to lock into interest rates for longer. MYGA laddering can help mitigate the risk of rising interest rates. By purchasing several MYGAs with staggered guarantee periods, higher-yielding annuities can be bought as each MYGA comes due.

Using a 1035 exchange, the gain in interest can continue to be tax-deferred.  Penalty-free withdrawals can also be used to purchase higher-yielding annuities, although taxes may need to be paid on any gain in the contract.

3. Liquidity

When considering a Multi-Year Guaranteed Annuity (MYGA), investors should understand the liquidity options available. Many annuities allow penalty-free withdrawals of interest or 10 percent of the account value, giving investors some control over their funds.

There may be trade-offs, with higher yields available from companies that do not allow penalty-free withdrawals. Some MYGAs permit penalty-free withdrawals from the first day, while others start this feature in year two. A waiver of withdrawal charges may also be available in the case of a terminal illness or long-term care need.

4.Carrier Rating

Safety is one of the primary reasons people purchase MYGAs. Unlike CDs, which the FDIC insures, annuities are regulated by the state, with each state having its own guarantee fund. The rating from an outside rating organization such as A.M. Best, Standard and Poor’s, and Moody’s will be an important factor when choosing a carrier.

Each agency has its own rating scale and standards. A letter grade is given, and numbers or plusses and minuses indicate minor variations in rating from another rating class. A++ is the top rating from A.M Best, with A+ being the second highest. An A+ from Standard and Poor’s is only the fifth-highest rating. The highest Standard and Poor’s rating is AAA.

Rather than looking at the grade, a better way of interpreting the rating from an agency is to determine whether a carrier is in the best risk category, the seventh highest, or some other category. The stronger the rating, the more likely the carrier will remain in business and meet its obligations.

Insurance companies like to highlight a higher rating from one agency, but agencies can disagree, so you should consider ratings from more than one service. Ratings can change, so annual reviews are advised.

The highest-rated carriers rarely have the highest-yielding guaranteed rate for MYGAs. Insurance companies are required to hold enough capital to cover losses. The National Association of Insurance Commissioners adopted a risk-based capital (RBC) requirement that considers the risk of the assets held, the insurance risk of the carrier's lines of business, interest rate risk, and all other business risks.

A higher-rated company typically has higher Risk-Based Capital ratios, essentially more capital against policy reserves, than a lower-rated company. As a result, they cannot offer as high a rate guarantee. A tradeoff of safety for rate will need to be evaluated.

5. Surrender Charges and Value Adjustments

Insurance companies charge a fee or penalty when money is withdrawn from an annuity and apply for a certain number of years after the annuity is purchased. This allows the company to recoup its costs and invest for a longer term. The charge is usually a percentage of the contract’s accumulation value, premiums paid, or the amount withdrawn.

The charge will typically decline each year that the contract is inforce. For example, the Sagicor Life Milestone Max MYGA 5 has a 9% surrender charge in the first year, 8% in the second, 7% in the third, 6% in the fourth, and 5% in the fifth year. As noted above, some annuities have liquidity provisions that allow a withdrawal of some of the funds without penalty.

Some carriers have Return of Premium features. These allow clients to withdraw nearly the full contract value during the surrender period without incurring surrender charges or market value adjustments (MVA). The price of this feature is lower guaranteed rates.

Market value adjustments (MVA) may apply during the surrender period if money above the penalty-free amount is withdrawn. An MVA protects the insurance company from interest rate risk.

For example, suppose you cash out your annuity before it is up, and interest rates have increased.

In that case, the company may impose a negative MVA to recoup its losses on the underlying investment. On the other hand, if interest rates have fallen, a positive MVA adjustment can be made. Products with MVA can offer higher rates because the carrier is not taking interest rate risk.

6. Banding

Some carriers band their products, offering a higher interest rate for premiums above a certain threshold. As an example, American National’s Palladium MYGA Annuity 7 product pays a 5.05% interest rate for initial premiums between $5,000 and $99,999, 5.15% for premiums between $100,000 and $249,000, and 5.30% for premiums between $250,000 and $3,000,000.

Carriers have fixed expenses spread out over larger policies and can offer higher rates for larger premiums. Clients will want to find the highest rate for the initial premium they are considering.

7. End of the Term Provisions

The provisions for the end of the initial guarantee period can vary across MYGAs. Some will have a window, typically 30 days, to move the account value at the end of the term. If the account is not transferred or moved, a new surrender period begins with the same surrender charges.  

Other contracts offer annual renewable interest rates without surrender charges at the end of the term. A minimum interest rate is guaranteed. Clients will need to keep track of the contract anniversary to ensure that funds are reallocated to meet their financial needs with available products in the market.

Conclusion:

Focusing solely on the interest rate is tempting when choosing the best annuity. However, there is more to evaluating an MYGA than just the rate. One or more of the above factors can be relevant to a client wanting to buy a MYGA. MYGAs are more than commodities, and given their increased complexity, all features must be considered when selecting the best policy.

How JRC Insurance Group Can Help

JRC is an independent life insurance agency that represents 63 highly rated providers. Access to dozens of insurers and their underwriting guidelines allows our agents to anonymously shop the market on your behalf to match you with the best policy for your budget and needs.

The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.