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Traditional Fixed Annuities |
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Traditional Fixed Annuities
Traditional fixed annuities are a type of deferred fixed annuity. There are several features associated with all fixed annuities: A set term or contract length, an initial guarantee, an initial guarantee period and a minimum guarantee. How do all of these pieces fit together? Let’s take a look at an example that will explain all of these parts.
Example: You could purchase a 7 year (the contract length or term) fixed annuity with 1 year (guaranteed period) guaranteed rate of 8%(initial guarantee) with a minimum guarantee of 3% (minimum guarantee).
In this example, you are purchasing a 7 year policy. In year 1 it will earn the guaranteed rate of 8%, so if you invested $100,000 you would earn $8,000 in the first year and have $108,000 at year end. In the year two the interest rate is unknown until the start of the second year. After year one the rate will be set annually on or around the policy anniversary. The only known factor is that the rate cannot fall below the minimum guarantee of 3%.
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Multi Year Guarantee (MYGA) Annuities AKA CD Type Annuties |
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Multi Year Guarantee (MYGA) Annuities AKA CD Type Annuities
A Multi Year Guarantee Annuity (otherwise known as a MYGA) is also called a CD Type Annuity. These CD Type Annuities are fairly new in the insurance world. Until recently the only type of fixed annuity that you could purchase is what we call today a “Traditional” fixed annuity. The difference between a CD Type annuity and a Traditional type annuity is the length at which the interest rate is guaranteed. Traditional fixed annuities generally offer high first year interest rates with a variable rate in the subsequent years. For example, you might find a 6 year Traditional fixed annuity with a 6% rate and a minimum guarantee of 3%. The way to interpret this type of annuity is as follows: The first year you are going to earn 6% interest. At the end of the first year your rate is going to reset to the “going market rate” at the time. Typically this rate is below the initial guaranteed rate but above the minimum guarantee of 3%. If rates are rising typically your rate will be higher than the 3% floor but if rates are going down there is a good chance that you will receive the minimum guarantee, but never less than the minimum guarantee.
CD Type annuities or Multi Year Guarantee Annuities were developed to take some of the confusion out of the fixed annuity world. They were specifically developed to attract those investors who prefer the predictability of Certificates of Deposit issued by banks, hence the name CD type annuity. CD Type annuities offer a guaranteed rate for a specific term. For example you might find a MYGA (Multi Year Guarantee Annuity) annuity that has a 5 year term and an interest rate of 4%. In this case you are guaranteed 4% each year for 5 years. After the 5 year period is over the rate typically resets similarly to a Traditional fixed annuity where it resets annually never going below a minimum guarantee set at the contract date (typically 2-3%).
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