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Understanding Fixed Deferred Annuities

The deferred annuity is among the most common type and incorporates a wide range of products, including income-based products like: 

  • Deferred income annuities
  • Investment-first products like variable annuities

One of the most popular types of deferred annuities is a fixed deferred annuity, which offers a predetermined interest rate over a certain period of time.

Key Facts on MYGA’s vs Traditional Fixed Deferred Annuities

  1. Fixed deferred annuities are a reliable fixed-interest investment that offers predictable returns over the guarantee period. 
  2. Multi-year guaranteed annuities are a type of fixed deferred annuity that offer a flat, guaranteed rate that lasts as long as the surrender period
  3. All fixed annuities, including MYGAs, offer tax-deferred compound growth.

Traditional Fixed Deferred Annuity

A traditional fixed deferred annuity only offers a guaranteed interest rate for a single year before the rate is reset to a new rate that could be higher or lower. That is all dependent on the prevailing interest rate environment at the time. The length of the contract is determined by the surrender period, which is most commonly between three and seven years. All contracts provide a minimum guaranteed rate of return that places a floor on the interest the contract owner can earn. 

Traditional fixed deferred annuities often allow flexible premium payments, which allows the contract owner to add money to the contract over time. Each contract is different, and funding rules differ among annuity companies. 

Multi-Year Guaranteed Annuity

Multi-year guaranteed annuities (MYGAs) are fixed annuity contracts specifically designed to offer guaranteed rates of interest that last throughout the contract’s surrender period. Contract lengths typically vary between one and 10 years, and the interest rate is guaranteed to remain flat throughout. 

These contracts are funded on a single, one-time basis at the beginning of each contract. An owner who wants to add money would need to open a new MYGA contract instead of adding to their existing one. MYGAs are most closely related to the investment performance of CDs. 

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MYGAs vs Traditional Fixed Annuities

Multi-Year Guaranteed AnnuityTraditional Fixed Annuity
FundingSingle premium onlySingle or flexible premium as allowed by issuer
GrowthFixed, guaranteed interest rate lock for the entire surrender periodOne-year rate lock reset annually; minimum guaranteed interest rate floor for the life of the contract
CostsNo upfront or internal fees; optional riders may have additional costs, and surrender charges may apply to early withdrawalsNo upfront or internal fees; optional riders may have additional costs, and surrender charges may apply to early withdrawals
Contract LengthOne- to 10-year termsSurrender periods typically three to seven years; minimum interest floor has no expiration.
WithdrawalsStandard 10% penalty-free withdrawal annually (subject to issuer rules)Standard 10% penalty-free withdrawal annually (subject to issuer rules)

Choosing the Right Product for You

With various types of annuities, it isn’t always clear how to pick the right product for your goals. The differences between traditional fixed annuities and the MYGA mean they offer advantages in different market environments. 

Benefits of a Traditional Fixed Deferred Annuity

The traditional fixed annuity’s annual rate reset makes it ideal for periods when interest rates may be rising. Capturing a rising interest rate will be a significant advantage for this type of product over the multi-year lock of the MYGA. Alternatively, a falling interest rate environment may not be the best for this product.

The minimum guaranteed rate floor’s lifetime availability makes this a product that could be held indefinitely, even after the surrender period has ended. As long as the money is not withdrawn, it will continue to compound on a tax-deferred basis. 

Benefits of a MYGA

Investors who want predictability may choose the MYGA option to ensure stable and reliable growth over a multi-year period. MYGAs will offer better performance than traditional fixed annuities during falling interest rate environments because their rate of return will not change annually. 

At the end of the contract term, investors must decide whether to withdraw or reinvest in another contract. During the contract period, invested funds will grow and compound on a tax-deferred basis. 

Frequently Asked Questions

What is the difference between a traditional fixed annuity and a multi-year guaranteed annuity (MYGA)?

A traditional fixed annuity offers a guaranteed interest rate for one year, after which the rate is reset based on prevailing market conditions. In contrast, a MYGA locks in a fixed interest rate for the entire contract term, which typically ranges from one to 10 years, offering stability and predictability over time.

Can I add more funds to a MYGA during the contract term?

No, MYGAs are funded with a single premium, and additional contributions are not allowed.

What happens at the end of a MYGA contract?

At the end of a MYGA contract, you can choose to withdraw your funds, reinvest them in another MYGA, or explore other investment options.

Still have questions?

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: February 10, 2025
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