Choosing the Best Fixed Annuity (MYGA)
There has been sort of a frenzy surrounding annuities since rates started rising 18 months ago. Processing times at insurance companies slowed dramatically as more and more people flocked to get rates that haven’t been available since 2010 or earlier. Rates settled a bit earlier this year but have climbed back recently and in many cases are the highest available yet. Good deals are available from income or accumulation for anyone who is tired of the stagnant but volatile stock market. But choosing the best fixed annuity is where things get a little muddy for some people.
Fixed annuities or MYGAs have definitely created the biggest buzz. The simplicity of the product makes it worth considering for a variety of retirement planning goals. Portfolio balance, income planning or just parking money with a decent interest rate are just a few of the reasons that fixed annuities appeal to so many people. For lots of people it’s just a good CD alternative because of the tax deferral available for non-qualified assets. Regardless of the purpose, the highest increase in sales over the past year came from this category of annuities.
There are lots of people who publish the highest rates available so it’s easy to shop around, but the rate doesn’t tell the whole story. It’s a competitive market on the sales side of this and a lot of guys will sell just about anything to make a buck and get you on their list of clients. I am a little more discerning and hold contracts to a much higher standard. Plus, the contracts with the highest rates may not have all the benefits a person needs so I don’t advertise them just to tell someone that specific deal won’t work for them.
When it comes to choosing the best fixed annuity, all features must be taken into consideration. I believe the financial strength of the issuing company to be paramount and that puts me at a disadvantage to the guys pushing higher rates in order to sell as much as possible. There are several other variables that can be evaluated to tell where the best value is. If any of these doesn’t matter to you then ignore it and go with whatever you want. I’ll explain each of the factors below so the rate shoppers pay closer attention to details that could be important
Company Financial Strength
I don’t know why anyone would pass up an A+ company just to get an extra half percent annually from a B+ company. Safety is the primary reason for using annuities so this one doesn’t make sense to me. On top of that, many of the top rates are offered by private equity led companies. In most cases, a private equity firm purchased an insurance company in order to gain management of all of the company’s capital. This adds a wrinkle to the traditional operation of insurance companies and I don’t trust it.
If you want to do some research, look into the “Bermuda Triangle” and TSR Ratios. Kerry Pechter has done significant work on this and you can find one of his articles at this link. Why Life Insurers Fly into the ‘Bermuda Triangle’ I plan to do a specific podcast on this and may even have Kerry Pechter back as a guest.
Simple vs Compound Interest
Look closely for this one. Compound interest is obviously superior but at least one of the top products in the past year paid on simple interest annually. It doesn’t matter at all for those who want to take interest payments right away. For those who want accumulation over multiple years then you have to compare long-term calculations to see where the balance eventually ends. The longer the term, the less compound interest you need to beat the simple interest balance.
Free Withdrawal Provision
These can range from 0% to 10% so make sure you get something that has the liquidity you need. Many of the products with higher rates have no withdrawals, interest only or even just 5%. Any are fine so long as it works with your plans but you have to look at more than the posted rate to make sure.
What happens at the end of the surrender term can definitely have an effect on your overall financial plan and any flexibility you may need to make changes. Many of the MYGAs available give you a 30 day window to move the money when it’s over. If you don’t then you enter a new surrender period of the same length with the same charges for early exit.
I prefer contracts that are annually renewable at the end of the initial surrender period. There are no new surrender charges for leaving the money there and the rate renews each year subject to a guaranteed minimum rate stated on the issue date. This give much more flexibility as you don’t have to rush to make a decision and can take your time planning the next move with no penalty at all.
Most companies have a fee-based option, which is a contract that does not pay commission and is sold by broker-dealers and registered investment advisors. The rates appear higher because the advisor on record will charge a management fee which reduces the effective yield. Depending on the brokerage agreement you will likely not do any better by chasing the rate alone.
This is a tough one to explain because you guys can’t see commissions. Commission and interest rates should be similar across the industry. When a commission is really high along with a top-of-the-market rate, it causes me to scratch my head. What does this company know that no one else does? Chances are they either have a riskier investment portfolio or are making little to no money by selling the annuity.
Some companies will even lose money just to gain more assets and juice the balance sheet. There is one company that has very competitive rates and pays really low commissions. It’s not the highest rated company but it gives me confidence that the company isn’t overextending itself just to collect assets. First and foremost I want you to make money safely then I want the insurance company to make money so they stick around to honor promises.
As you can see, there is so much more to choosing the best fixed annuity or MYGAs than just the rate. One or more of the above is likely to be relevant to anyone wanting to buy one. Because there is so much more to it, I don’t post rates just to sell as much as possible. There is far more to buying annuities when considering all factors of a solid retirement plan.
This website is not focused on sales for that reason alone. If there is anything about choosing the best fixed annuity that you’d like to know but aren’t getting from another agent or an online search, you can bet I’ll set the record straight and give you everything you need to know. Just make an appointment and we’ll get it done.
Watch The Episode: Choosing The Best Fixed Annuity
Last Updated on October 27, 2023 by Bryan Anderson