Stinky wrote: ↑Tue Apr 13, 2021 6:10 am
I'm currently a fan of MYGAs. As I have mentioned elsewhere, I have constructed a "MYGA ladder" of various maturities for myself, similar to a CD ladder. I also hold bond funds, but my MYGA balance is currently larger than my bond fund balance. My MYGA purchases began about six months ago. Most of my MYGAs are in IRA accounts, and I also have a MYGA in my taxable account.
As full disclosure, I do not sell insurance of any type and never have. However, I worked in a senior financial position for a major life insurance company for my entire working career, and I've seen the product specifications and pricing for many life and annuity products, including MYGAs. So I've got more personal knowledge than many folks do about how annuities and life insurance work.
On the good side -
—- MYGAs currently offer an interest rate well higher than available on bond funds of similar duration.
—- MYGAs also have a credit backstop, beyond the insurance company guaranty, of the state life and health Guaranty Funds. I have seen Guaranty Funds in action with respect to insolvent life insurers. The Funds do their best to fully restore policyholders to their full position in the unfortunate case of an insurer failure, up to the limits of the Guaranty Fund. Anybody buying a MYGA should be familiar with the limits of his state's Guaranty Fund. (Google "(your state of residence) life and health guaranty fund" to find the website for your state's Fund.)
—- Any annuity (including MYGAs) that are purchased in a taxable account defer the recognition of taxable interest to the time when funds are actually withdrawn from the annuity, rather than reporting interest income annually as is the case with a CD or bond fund.
—- Finally, MYGAs offer transparency as to the earned rate. What you are promised is what you will get.
On the bad side -
—- MYGAs have either no or limited liquidity except at the expiry of the guaranty period. Most MYGAs have significant surrender charge and market value adjustment penalty for withdrawals beyond any penalty-free withdrawal. So a person shouldn't substitute a MYGA for a money market fund or other short-term investment.
—- When purchased in a taxable account, any interest withdrawals prior to age 59.5 are subject to an additional 10% income tax penalty, beyond regular income taxes.
—- Annuities, including MYGAs, do not receive a step-up in basis at death, so even if recognition of taxable income is deferred to a person's date of death, someone will eventually pay taxes on the interest earned.
With market interest rates at their current low level, and with the higher MYGA interest rate than bond funds, I regard the purchase of a MYGA at the present time as a win-win.
--- If market interest rates stay low, I'll be collecting the higher MYGA interest rate for the full term of the MYGA. That's a win.
--- If market interest rates rise, I may get to a place where the yield on the bond fund exceeds the MYGA. However, in that case, the bond fund will have lost market value due to the rise in interest rates, while the MYGA will not have lost value. So, once again, that's a win.
My MYGAs will be maturing over the next number of years. As each MYGA matures, I'll be making a decision as to whether to renew into a new MYGA or to roll the proceeds into other fixed income. If spreads between MYGA rates and bond funds remained at their current levels, and interest rates remain low, I'd anticipate rolling into new MYGAs at that time.