How a Multi-Year Guaranteed Annuity Works

What a Multi-Year may provide Annuity Is

A multi-year may provide annuity (often called an MYGA) is a contract with an insurance company where you give them a lump sum of money, and they promise to pay you a fixed interest rate for a set number of years — typically three to ten years. At the end of that period, you can withdraw your money, move it elsewhere, or let the contract renew.

The insurance company locks in your rate when you buy the contract. If interest rates rise during your contract period, your rate stays the same. If rates fall, you are protected from that decline. You know exactly what you will earn before you hand over any money.

MYGAs are different from regular savings accounts or CDs because they are issued by insurance companies rather than banks, and the rate is typically higher than what banks offer. They are also different from variable annuities, which tie your returns to stock market performance, or when ready annuities, which convert your money into monthly payments right away.

Key Takeaways

• An MYGA guarantees a fixed interest rate for a specific number of years, usually between three and ten.
• Your money is locked in for the contract period, and withdrawing early usually means paying a surrender charge.
• The rate you receive is set when you purchase the contract and does not change, even if market rates move.
• At the end of the contract term, you can take your money out, renew at a new rate, or transfer it to another product.
• MYGAs are backed by the claims-paying ability of the insurance company, not by the FDIC like bank deposits.

How the Interest Rate and Term Length Work

When you open an MYGA, you choose two things: how long you want to lock in your money (the term) and you receive a rate based on that term. Longer terms usually come with higher rates. A three-year MYGA might offer 4.5 percent, while a seven-year MYGA from the same company might offer 5.2 percent. The insurance company sets these rates based on what they think interest rates will do and what they can earn by investing your money.

The rate printed in your contract is what you get for the entire term. If you keep your money in the account for the full period, you earn that rate every year. Interest is typically credited annually, though some contracts credit it monthly or quarterly. You can usually see the exact crediting schedule in your contract documents.

Once the term ends, you have choices. You can withdraw all your money without penalty. You can renew into a new MYGA contract, though the rate will be whatever the insurance company is offering at that time — it could be higher or lower than your original rate. Or you can move your money to a different product, such as an when ready annuity or a different insurance company's MYGA.

Surrender Charges and Early Withdrawal Rules

If you need your money before the contract term ends, most MYGAs allow you to withdraw it, but you will pay a surrender charge. This is a penalty that the insurance company deducts from your account. The charge is usually highest in the first year and decreases each year. For example, a seven-year MYGA might charge 7 percent in year one, 6 percent in year two, and so on, dropping to zero in year seven.

Some contracts include a free withdrawal provision, which lets you take out a small amount each year — often 10 percent of your account value — without paying the surrender charge. This can be useful if you need access to some of your money but want to keep most of it locked in at the may provide rate.

Before you buy an MYGA, read the surrender charge schedule carefully. If you think you might need the money within the contract period, a shorter-term MYGA or a different product might be a better fit. The surrender charge is the insurance company's way of protecting itself against interest rate risk — if rates have risen since you bought the contract, they do not want you to leave and move your money to a higher-paying product.

How MYGAs Compare to Other Savings and Annuity Products

MYGAs sit in the middle ground between straightforward savings and more complex annuity products. A regular savings account or money market account at a bank offers lower rates but complete flexibility — you can withdraw whenever you want. A CD from a bank works similarly to an MYGA: you lock in a rate for a term and pay a penalty if you withdraw early. The main difference is that CDs are insured by the FDIC up to $250,000, while MYGAs are backed by the insurance company's financial strength.

An when ready annuity converts your lump sum into a stream of monthly payments that last for life or a set period. You cannot get your principal back, but you get income you cannot outlive. An MYGA keeps your principal intact and lets you decide what to do with it when the term ends.

A variable annuity ties your returns to the performance of investment accounts you choose, usually stock and bond funds. Your rate is not may provide, and you could earn more or less depending on market performance. Variable annuities also come with higher fees and more complexity than MYGAs.

Who Issues MYGAs and How Safe They Are

MYGAs are issued by insurance companies, not banks. The insurance company takes your money and invests it in bonds and other fixed-income securities. Your contract is backed by the insurance company's ability to pay, not by government insurance like the FDIC.

Before you buy an MYGA, you can check the financial strength of the insurance company through rating agencies like A.M. Best, Moody's, or Standard & Poor's. These agencies rate insurance companies on their ability to pay claims. A company with a high rating (such as A+ or higher from A.M. Best) is considered very strong. You can look up ratings for free on these agencies' websites.

If an insurance company fails, state insurance guaranty funds may cover some of your loss, but the coverage limits vary by state and are usually lower than FDIC limits. For this reason, many people buy MYGAs from multiple insurance companies to spread their risk, or they choose companies with the highest financial ratings.

Tax Treatment of MYGA Interest

Interest earned in an MYGA is taxable as ordinary income in the year it is credited to your account, even if you do not withdraw the money. If your MYGA credits interest annually, you will owe taxes on that interest each year, even though the money stays in the account.

If you own the MYGA in a tax-deferred account such as an IRA or 401(k), you do not pay taxes on the interest until you withdraw money from the account. This is one reason people sometimes buy MYGAs inside retirement accounts — the tax deferral can help the money grow faster.

If you own the MYGA in a regular taxable account, you will receive a 1099-INT form from the insurance company each year showing the interest you earned. You report this on your tax return. If you are in a high tax bracket, the after-tax return on an MYGA might be lower than it appears, so it is worth doing the math before you buy.

When an MYGA Might Make Sense for You

An MYGA works well if you have money you do not need for several years and you want to know exactly what it will earn. If you are uncomfortable with stock market risk or you are nearing retirement and want predictable income, an MYGA can be part of your plan.

MYGAs also work well if you are in a period of high interest rates and you want to lock in a rate before rates fall. If you think rates will rise, you might prefer a shorter-term MYGA so you can renew at a higher rate sooner, or you might choose a different product altogether.

An MYGA is less useful if you might need the money within the contract period, because the surrender charge will eat into your returns. It is also less useful if you are in a very low tax bracket and the tax-deferred growth does not matter much to you, or if you have a very long time horizon and you think you could earn more from a diversified investment portfolio.

Frequently Asked Questions

Can I withdraw my money early from an MYGA?

Yes, but you will pay a surrender charge that reduces your withdrawal amount. The charge is usually a percentage of your account value and decreases each year. Some contracts allow you to withdraw a small amount each year (often 10 percent) without penalty. Check your contract for the exact terms.

What happens when my MYGA contract term ends?

When the term ends, you can withdraw your money penalty-free, renew into a new MYGA at the current rate the insurance company is offering, or transfer the money to another product. You do not have to do anything — if you do not take action, the contract will usually renew automatically, though you should review the new rate before it does.

Is my money in an MYGA insured like a bank deposit?

No. MYGAs are backed by the insurance company's financial strength, not by the FDIC. However, state insurance guaranty funds may cover some losses if an insurance company fails, though coverage limits vary by state. You can check an insurance company's financial rating through A.M. Best or other rating agencies before you buy.

How is MYGA interest taxed?

Interest is taxed as ordinary income in the year it is credited to your account, even if you do not withdraw it. If the MYGA is inside a retirement account like an IRA, taxes are deferred until you withdraw. You will receive a 1099-INT form each year showing the interest earned.

What is the difference between an MYGA and a CD?

Both lock in a rate for a set term and charge a penalty for early withdrawal. The main difference is that CDs are issued by banks and insured by the FDIC, while MYGAs are issued by insurance companies and backed by their financial strength. MYGAs often offer slightly higher rates than CDs, but the insurance backing is weaker.