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Fixed Annuities aka MYGA Annuity: How Does a Fixed Annuity Work?

Fixed Annuity, Fixed Annuities Overview

What is a Fixed Annuity?

A fixed annuity is a type of annuity contract where the insurance company provides a guaranteed, fixed rate of interest on the invested funds for a specified period.

Growth

Fixed annuities also known as “MYGAs,” which stands for “multi-year guaranteed annuity.” These type of annuity products function very similar to CDs (certificate of deposit).

The insurance company determines the interest rate offered. More often than not, rates are tiered and based on the premium amount paid into the contract.

Generally, the higher the premiums the higher the rate. 

The insurance company guarantees a rate for a specified period, and there is usually no action required on your part once that period is up.

After the guaranteed term of the annuity expires, owners can choose to keep their funds in the annuity. However, it’s important to note that the interest rate may vary, influenced by current market conditions and offerings.

A handful of fixed annuity products have surrender schedules that “renew” or restart if you leave the funds in the annuity after the specified “grace period.” Grace periods often range between 30 – 45 days.

It’s important to note that Fixed annuities contain a “minimum guaranteed interest rate” or “MGIR,” which means you’ll never get less than “x“ amount for the life of the contract. 

“MGIR,” or “minimum guaranteed interest rate,” is the minimum amount you’re guaranteed to earn. Keep in mind that you’re guaranteed to make anything either. I’ve seen plenty of contracts that quoted an MGIR of 0%.


Annual Fees

Fixed Annuities don’t have annual fees unless a rider is added on to the contract.


Insurance Aspects

  • Death Benefit: The “standard” death benefit for Fixed Annuities is simply the contract value, plus pro-rated interest, less any pro-rated annual fees (if applicable). 
  • Income Benefit: Contract owners must annuitize the contract for the guaranteed income stream to take effect unless the contract has an income rider.
  • Available Riders: Death Benefit Rider, Living Benefit Rider (Income Rider), LTC Rider, Liquidity Rider, Cash Refund Rider (Immediate Annuities Only).

Surrender Cost(s)

  • Surrender Schedule: Surrender schedules for Fixed Annuities ranges anywhere from 1 year up to 10 years, but 3, 5, and 7 years tend to be the most common schedules.
  • Market Value Adjustment (MVA): Market Value Adjustments can be applicable during the surrender period for both Fixed and Fixed Index Annuities but it’s more common on Fixed Index Annuities. 

Many forms of Fixed Annuities 

As simple as these products are, Fixed Annuities come in many forms which enables them to accommodate the needs of many retirees.

Fixed annuities can either be a fixed deferred annuity aka MYGA or immediate annuity.

There is also a specific type of fixed annuity that features specialized RMD tax treatment, also known as “QLACs.”

MYGA

Fun Fact:

What is a MYGA annuity? “MYGA” stands for Multi-Year Guarantee Annuity, a common Fixed Annuity product.


QLAC Annuity – What is a QLAC? 

A QLAC is also known as “Qualified Longevity Annuity Contract.” These contracts can offer some relief for retirees who are looking to minimize their required minimum distributions (RMD). 

What are Required Minimum Distributions (RMDs)?

According to the IRS website: “Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 72 (70 ½ if you reach 70 ½ before January 1, 2020), if later, the year in which he or she retires.”

Retirees can rollover up to $135,000 of their qualified assets into a QLAC, with the intent to start taking income by age 85 in the form of annuity payments.

The assets held within a QLAC will no longer be considered in the calculation of your RMD, thus minimizing your required minimum distribution amount. 

QLAC Assets

Funds can be transferred from any type of qualified account except for Inherited IRAs  and any type of Roth account since the tax advantages don’t apply.

Roth Accounts Examples:  Roth IRAs, Roth 403b, and Roth 401Ks


Fixed Annuity Advantages and Fixed Annuity Disadvantages

Pros

  • Sheltered from market volatility
  • Competitive rates in comparison to money market accounts
  • Transparent and easy to understand
  • Available as an Immediate Annuity or Deferred Annuity
  • Offers specialized RMD treatment in the form of “QLACs”

Cons

  • Lack of liquidity due to surrender penalty
  • Limited growth in comparison to market returns

Disclaimer: The opinions expressed in this blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security, investment, or insurance product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.


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