Need direction_understanding MYGA(multi-year guaranteed annuity

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Godot
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

Post by Godot »

Bunty wrote: Sat Jun 05, 2021 8:44 pm
gips wrote: Fri Jan 08, 2021 11:48 am i’ve looked at mygas and my position is that like many financial services products, they are predicated on obfuscating risk to the consumer. i know there has been thoughtful analysis on the forum to quantify risk but market structure is efficient and a 3% return in this market is the best indicator these policies entail quite a bit of hidden risk.

best,
I think so too that there is some hidden risks of MYGA that are not apparent.
All hidden risks by definition are not apparent. But what are you thinking about, for example?
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

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Bunty wrote: Sat Jun 05, 2021 8:44 pm
gips wrote: Fri Jan 08, 2021 11:48 am i’ve looked at mygas and my position is that like many financial services products, they are predicated on obfuscating risk to the consumer. i know there has been thoughtful analysis on the forum to quantify risk but market structure is efficient and a 3% return in this market is the best indicator these policies entail quite a bit of hidden risk.

best,
I think so too that there is some hidden risks of MYGA that are not apparent.
Please educate us.
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Willmunny
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

Post by Willmunny »

A couple questions:

(1) I know all contracts are different, but for someone who has a MYGA, could you give me an example of what a surrender charge would be?

(2) On the hidden risks comments above, I am not expert, but from what I have read: (a) the commission is baked into the rate (so the rate you receive has the commission already baked in); (b) if the insurance company gets into financial trouble and cannot pay, then you MAY have recourse with a state guarantee fund (each state having a limit and rules - I would view this protection as less than FDIC or NCUA protection granted to a CD issued by a bank or credit union); and (c) the surrender charges are likely more significant than, for example, the early withdrawal from a bank CD (the bank CD early withdrawal penalties differ per the various bank policies, but I did an early withdraw from a bank CD one time when rates just about doubled and I had 3 more years on that CD, and my penalty was 6 months of interest). Are there other risks I am not seeing here?
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

Post by HueyLD »

Willmunny wrote: Fri Jun 18, 2021 8:13 am A couple questions:

(1) I know all contracts are different, but for someone who has a MYGA, could you give me an example of what a surrender charge would be?

(2) On the hidden risks comments above, I am not expert, but from what I have read: (a) the commission is baked into the rate (so the rate you receive has the commission already baked in); (b) if the insurance company gets into financial trouble and cannot pay, then you MAY have recourse with a state guarantee fund (each state having a limit and rules - I would view this protection as less than FDIC or NCUA protection granted to a CD issued by a bank or credit union); and (c) the surrender charges are likely more significant than, for example, the early withdrawal from a bank CD (the bank CD early withdrawal penalties differ per the various bank policies, but I did an early withdraw from a bank CD one time when rates just about doubled and I had 3 more years on that CD, and my penalty was 6 months of interest). Are there other risks I am not seeing here?
(1) For example, 9% 8% 7% 6% 5% surrender charges for years 1, 2, 3, 4, 5 respectively. In addition, there is a market value adjustment (MVA) based on a predefined formula to account for interest rate changes.

(2) However, many contracts have 10% per year penalty free withdrawals and penalty free means no surrender charges and no MVAs.

(3) Some contracts have additional waivers for penalty free withdrawals for reasons such as serious illnesses, nursing home confinement, etc.

You simply have to read the contract before pulling the trigger.
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

Post by Stinky »

Willmunny wrote: Fri Jun 18, 2021 8:13 am A couple questions:

(1) I know all contracts are different, but for someone who has a MYGA, could you give me an example of what a surrender charge would be?

(2) On the hidden risks comments above, I am not expert, but from what I have read: (a) the commission is baked into the rate (so the rate you receive has the commission already baked in); (b) if the insurance company gets into financial trouble and cannot pay, then you MAY have recourse with a state guarantee fund (each state having a limit and rules - I would view this protection as less than FDIC or NCUA protection granted to a CD issued by a bank or credit union); and (c) the surrender charges are likely more significant than, for example, the early withdrawal from a bank CD (the bank CD early withdrawal penalties differ per the various bank policies, but I did an early withdraw from a bank CD one time when rates just about doubled and I had 3 more years on that CD, and my penalty was 6 months of interest). Are there other risks I am not seeing here?
1. For one of today’s most popular contracts, the 5 year product from Sagicor, the surrender charge is 9% in the first policy year. It is followed by surrender charges of 8%, 7%, 6%, and 5% in succeeding policy years.

In addition to surrender charges, most policies have a market value adjustment on premature surrenders. This will be a negative to you if interest rates have gone up.

The Blueprint Income website shows the surrender charge schedules for all products that are sold there.

2. I think that all the risks you identify are correct, with one clarification. If your insurer goes insolvent, your state guaranty fund WILL step in. The coverage from your guaranty fund varies by state, and I strongly encourage you to become familiar with the terms of yours state’s coverage.

Post back with questions. If you haven’t seen it, there is a longer thread with much more information on MYGAs: viewtopic.php?f=1&t=334589
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

Post by indexfundfan »

As Stinky and HueyLD mentioned, most policies start with 9% or 10% surrender charge in the first years, plus the market value adjustment charge. The MVA benefits you if interest rates have gone down but penalizes you if interest rates have gone up at the point when you surrender the policy.

The odd exception I know of is Gainbridge. Their policies start off with 3% surrender charge instead of 9% or 10%. MVA still applies.
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

Post by Willmunny »

Stinky wrote: Fri Jun 18, 2021 10:23 am
Willmunny wrote: Fri Jun 18, 2021 8:13 am A couple questions:

(1) I know all contracts are different, but for someone who has a MYGA, could you give me an example of what a surrender charge would be?

(2) On the hidden risks comments above, I am not expert, but from what I have read: (a) the commission is baked into the rate (so the rate you receive has the commission already baked in); (b) if the insurance company gets into financial trouble and cannot pay, then you MAY have recourse with a state guarantee fund (each state having a limit and rules - I would view this protection as less than FDIC or NCUA protection granted to a CD issued by a bank or credit union); and (c) the surrender charges are likely more significant than, for example, the early withdrawal from a bank CD (the bank CD early withdrawal penalties differ per the various bank policies, but I did an early withdraw from a bank CD one time when rates just about doubled and I had 3 more years on that CD, and my penalty was 6 months of interest). Are there other risks I am not seeing here?
1. For one of today’s most popular contracts, the 5 year product from Sagicor, the surrender charge is 9% in the first policy year. It is followed by surrender charges of 8%, 7%, 6%, and 5% in succeeding policy years.

In addition to surrender charges, most policies have a market value adjustment on premature surrenders. This will be a negative to you if interest rates have gone up.

The Blueprint Income website shows the surrender charge schedules for all products that are sold there.

2. I think that all the risks you identify are correct, with one clarification. If your insurer goes insolvent, your state guaranty fund WILL step in. The coverage from your guaranty fund varies by state, and I strongly encourage you to become familiar with the terms of yours state’s coverage.

Post back with questions. If you haven’t seen it, there is a longer thread with much more information on MYGAs: viewtopic.php?f=1&t=334589
Thanks for this. I think these can have a place during the accumulation phase for fixed income held outside of a retirement account. The surrender charges are hefty, so they appear to be much more of a commitment to "hold to maturity" than most CD early withdrawal penalties I have seen.

The reason I said MAY rather than WILL is: (1) I am uncertain as to whether these state guaranty agencies are backstopped by the taxing power of the state in question (perhaps they are - but even if so, in a severe financial crisis, states can't just print more money to pay claims like the federal government can do with FDIC insurance) and (2) I am unsure if you buy an annuity while a resident of state X and move to state Y, which (if any) state guaranty fund would cover it.
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

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Willmunny wrote: Sat Jun 19, 2021 10:23 am The reason I said MAY rather than WILL is: (1) I am uncertain as to whether these state guaranty agencies are backstopped by the taxing power of the state in question (perhaps they are - but even if so, in a severe financial crisis, states can't just print more money to pay claims like the federal government can do with FDIC insurance) and (2) I am unsure if you buy an annuity while a resident of state X and move to state Y, which (if any) state guaranty fund would cover it.
(1) They are not backed up by the state itself. The way I view things is that if a single insurer goes insolvent the guaranty fund is likely going to save your day up to the limit. But if there is a large systemic crisis and multiple insurers start falling at the same time, you are our of luck...
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

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Willmunny wrote: Sat Jun 19, 2021 10:23 am Thanks for this. I think these can have a place during the accumulation phase for fixed income held outside of a retirement account. The surrender charges are hefty, so they appear to be much more of a commitment to "hold to maturity" than most CD early withdrawal penalties I have seen.

The reason I said MAY rather than WILL is: (1) I am uncertain as to whether these state guaranty agencies are backstopped by the taxing power of the state in question (perhaps they are - but even if so, in a severe financial crisis, states can't just print more money to pay claims like the federal government can do with FDIC insurance) and (2) I am unsure if you buy an annuity while a resident of state X and move to state Y, which (if any) state guaranty fund would cover it.
Guaranty funds are most assuredly NOT agencies of state government. They do not have taxing authority behind them. They rely on assessments from member companies. Membership in the guaranty association, and payment of assessments, is mandatory.

As to coverage if you move, I suggest that you explore the details of your state's guaranty fund website. Here's language from the Alabama (my state's) website:

If I move to another state after purchasing a policy, will I still have guaranty association coverage? If so, who will provide it?

If you purchased a policy from a company that is a member insurer of the state guaranty association where you reside, you will have coverage. Guaranty association protection is generally provided by the association in your state of residence at the date of the liquidation order regardless of where your policy was purchased. Policyholders who reside in states where the insolvent insurer was not licensed are covered, in most cases, by the guaranty association of the state where the failed company was domiciled.
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

Post by OkieIndexer »

I have been reading here about MYGAs (several threads) and did searches for answers, but I'm still wondering if the surrender fee of a MYGA can eat into your principal? On another site, "Angry Retail Banker" says "You’d do better (than CDs) with a fixed annuity, which has a guaranteed interest rate, liquidity features not available with a CD, and a principal guarantee. As a matter of fact, the principal guarantee prevents early surrender charges from eating into your principal if you close the MYGA too early. These features are NOT on CDs; you can actually lose principal on a bank CD."

Is that true? Seems too good to be true 😄. Cannot lose principal with an early withdrawal, even withdrawing everything in the first year? I assumed a 9% surrender fee (for example) would eat significantly into the principal in the first year. I know Canvas's Flex MYGA has a "can't lose principal, even with early withdrawal" feature, but I thought you generally do lose principal with MYGAs if the surrender fee is greater than the interest earned so far?
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

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OkieIndexer wrote: Tue Jul 06, 2021 11:35 am I have been reading here about MYGAs (several threads) and did searches for answers, but I'm still wondering if the surrender fee of a MYGA can eat into your principal? On another site, "Angry Retail Banker" says "You’d do better (than CDs) with a fixed annuity, which has a guaranteed interest rate, liquidity features not available with a CD, and a principal guarantee. As a matter of fact, the principal guarantee prevents early surrender charges from eating into your principal if you close the MYGA too early. These features are NOT on CDs; you can actually lose principal on a bank CD."

Is that true? Seems too good to be true 😄. Cannot lose principal with an early withdrawal, even withdrawing everything in the first year? I assumed a 9% surrender fee (for example) would eat significantly into the principal in the first year. I know Canvas's Flex MYGA has a "can't lose principal, even with early withdrawal" feature, but I thought you generally do lose principal with MYGAs if the surrender fee is greater than the interest earned so far?
Can you please post a link to the cited article? I found the website, but didn’t see the article on a quick scan. Unless there’s some clarifying language in the article, I think that he’s horribly wrong.

You can definitely can lose money on a MYGA if you make excess surrenders before the end of the guarantee period. I know for a fact that insurance company actuaries include “surrender charge income” in their pricing calculations. And when I log into some of my MYGA accounts, I see the “surrender value” shown that is well less than the premium paid.

Canvas sells two MYGA products - a traditional one with a surrender charge, and a “money back guarantee” product. You’ll note that the latter product has a lower credited rate than the former. The reason for the lower rate is the loss of “surrender charge income”.
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

Post by OkieIndexer »

Stinky wrote: Tue Jul 06, 2021 12:02 pm
OkieIndexer wrote: Tue Jul 06, 2021 11:35 am I have been reading here about MYGAs (several threads) and did searches for answers, but I'm still wondering if the surrender fee of a MYGA can eat into your principal? On another site, "Angry Retail Banker" says "You’d do better (than CDs) with a fixed annuity, which has a guaranteed interest rate, liquidity features not available with a CD, and a principal guarantee. As a matter of fact, the principal guarantee prevents early surrender charges from eating into your principal if you close the MYGA too early. These features are NOT on CDs; you can actually lose principal on a bank CD."

Is that true? Seems too good to be true 😄. Cannot lose principal with an early withdrawal, even withdrawing everything in the first year? I assumed a 9% surrender fee (for example) would eat significantly into the principal in the first year. I know Canvas's Flex MYGA has a "can't lose principal, even with early withdrawal" feature, but I thought you generally do lose principal with MYGAs if the surrender fee is greater than the interest earned so far?
Can you please post a link to the cited article? I found the website, but didn’t see the article on a quick scan. Unless there’s some clarifying language in the article, I think that he’s horribly wrong.

You can definitely can lose money on a MYGA if you make excess surrenders before the end of the guarantee period. I know for a fact that insurance company actuaries include “surrender charge income” in their pricing calculations. And when I log into some of my MYGA accounts, I see the “surrender value” shown that is well less than the premium paid.

Canvas sells two MYGA products - a traditional one with a surrender charge, and a “money back guarantee” product. You’ll note that the latter product has a lower credited rate than the former. The reason for the lower rate is the loss of “surrender charge income”.
I thought so. But do you know of any other MYGAs like Canvas Flex with a principal protected from surrender fees feature? Just curious. Here was the link, it's in the comments section (ARB , Jan 21,2016 11:56 AM)
https://www.financialsamurai.com/should ... orrection/
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

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OkieIndexer wrote: Tue Jul 06, 2021 12:17 pm But do you know of any other MYGAs like Canvas Flex with a principal protected from surrender fees feature? Just curious.

Here was the link, it's in the comments section (ARB , Jan 21,2016 11:56 AM)
https://www.financialsamurai.com/should ... orrection/
Maybe that was a true statement back in 2016, but I doubt it. It’s certainly not true today.

This is just further proof that you can’t trust everything you read on the internet.

As to other products - I’m not familiar with any other products that have a money back guarantee as a basic feature. However, some companies might offer the feature as an optional rider, that I expect would cost 0.25-0.50% per year. You could ask your agent if he’s aware of any companies that offer such a rider.
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

Post by rich126 »

Personally if I am buying a MYGA it is with money I won't need for the length of the MYGA. Buying a MYGA and then planning to take the money out early is a bad idea and you'd be better off with it in the bank, or a CD.

To me it would be like trying to buy a non-refundable airline ticket and then trying to find loopholes out of it.
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

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rich126 wrote: Tue Jul 06, 2021 12:36 pm Personally if I am buying a MYGA it is with money I won't need for the length of the MYGA. Buying a MYGA and then planning to take the money out early is a bad idea and you'd be better off with it in the bank, or a CD.

To me it would be like trying to buy a non-refundable airline ticket and then trying to find loopholes out of it.
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

Post by indexfundfan »

Canvas offers the only MYGA that I know of with a principal guaranty ("money back") on early surrender.

Gainbridge offers MYGAs with low early surrender penalty, on a sliding scale of 3%/2%/1%. But you still have to deal with any MVA (market value adjustment) from interest rate movements tied to Moody's Yield on Baa Corporate Bonds.
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

Post by Lieutenant.Columbo »

are MYGAs in Nov 2021 a serious/safe alternative for moneys a Florida resident has allocated over the years to a high-quality municipal-bonds fund?
thank you
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

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Lieutenant.Columbo wrote: Thu Nov 18, 2021 10:38 pm are MYGAs in Nov 2021 a serious/safe alternative for moneys a Florida resident has allocated over the years to a high-quality municipal-bonds fund?
thank you
You have to check the fault coverage in FL, in CA it's only 80%
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

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Lieutenant.Columbo wrote: Thu Nov 18, 2021 10:38 pm are MYGAs in Nov 2021 a serious/safe alternative for moneys a Florida resident has allocated over the years to a high-quality municipal-bonds fund?
thank you
In my view, MYGAs are certainly something to be considered as a fixed income alternative asset to bond funds. However, they are not as well known as some other fixed income asset classes, so you should gather information as you consider them.

You can get information about rates, benefits, etc. by looking at the websites of those who sell the product. My favorite MYGA seller is blueprintincome.com. Their website has information on products offered by numerous companies, and some good general information. You can also search the Forum for other threads on MYGAs - there have been several long threads in the last year or so. Here is a link to the longest recent thread: viewtopic.php?f=1&t=334589

One particular thing to be aware of is the limited liquidity features in almost all MYGAs. If you keep the contract for its entire term (for example, five years), you will be able to receive your premium and accrued interest at full value. However, if you need to withdraw funds from the contract prior to the end of its term, most MYGAs have significant surrender charges and market value adjustments that likely act to decrease the amount withdrawable. Only put money into a MYGA that you are reasonably certain that you can keep in the contract for the entire term.

As to safety of your funds - there are two levels of protection provided. The first is the guarantee of the issuing insurance company. Be aware of the relative financial strength of the insurance company from which you are purchasing, which can be indicated by the "rating" of the company. In general, companies with higher ratings (like A+ or A++ from AM Best) pay lower interest rates than those with lower ratings.

The second level of protection is provided by your state guaranty fund. You indicate that you're a Florida resident. Here is the website for the Florida life and health guaranty fund - I encourage you to become familiar with the coverage provided by that fund. In particular, my reading is that guaranty fund coverage for MYGAs is limited to $250k of annuity surrender value per insurance company. https://www.flahiga.org/

Interest on MYGAs in taxable accounts will be reported as taxable income when funds are withdrawn, so they are not "tax free" like most municipal bonds.

This is not a complete description of all of the nuances of MYGAs. Please post back with any questions that you have.
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Re: Need direction_understanding MYGA(multi-year guaranteed annuity

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Thank you very much!
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