What You Should Know When Buying a Multi-Year Guarantee Annuity

An MYG Annuity is a single premium annuity, meaning you pay one upfront premium when you purchase the contract. Additional contributions are not allowed after the initial purchase. However, you can purchase multiple contracts, each with its own guarantee period and interest rate. Contract lengths vary, and you are guaranteed a declared interest rate throughout the term of the contract. Interest rates after the guarantee period are typically lower than the original purchase rate.

When you purchase an MYG Annuity from American National Insurance Company (“American National”), your single premium will earn a declared rate of interest for the selected guarantee period. After the selected guarantee period, and if you choose to keep the contract¹, interest will be credited at a rate determined by American National each year.

When selecting an MYG Annuity, also consider the minimum and maximum contribution amounts allowed by the insurer and if your goals align with those limits. Remember that you are committing to a long-term contract and your liquidity will be limited, so it’s important to have other sources of available money.

It’s also important to determine what assets you have available and what percentage of those assets you want to allocate to an annuity. If you want to minimize your exposure to market volatility, a fixed rate annuity does not have exposure to market volatility and will provide a steady rate of return.

With an American National MYG annuity, minimum premiums can be as low as $5,000. But higher premium amounts qualify you for additional interest credits. For example, a premium amount of $100,000-$249,999 receives an additional 0.10% credit, and a premium of $250,000 or more receives an extra 0.25%. (Additional interest credits are subject to change and availability.)

You can use either qualified or non-qualified money to fund your MYG Annuity. Qualified money refers to money you haven’t paid taxes on, usually tax-deferred retirement accounts like a 401(k) or a traditional IRA. Earnings within a qualified annuity grow tax-deferred, meaning you won’t pay taxes until you withdraw money. Your interest will be compounded, so by deferring taxes and keeping that money in the annuity, your savings will grow more over time. Withdrawals on qualified accounts are taxed as ordinary income.

Non-qualified money has already been taxed, and could come from a savings, checking, or money market account. Earned interest on a non-qualified annuity is also tax-deferred and compounded, but when you make a withdrawal, you typically only pay taxes on the interest earned.

These funding options also present an opportunity to plan for different tax strategies. If you purchase your annuity with qualified money, your money grows tax deferred, but you will pay taxes on both the premium and interest when you take a withdrawal. If you think you’ll be in a lower tax bracket after retirement, or as you transition to retirement, and intend to use your annuity for income, this could be a smart tax strategy.

If you would like to earmark your annuity withdrawals for special purchases or one-time expenses, having a source of non-qualified money provides some withdrawal flexibility since you typically only pay taxes on earnings.

As tax rules can vary, you should consult your tax professional when considering funding and taxation options.

Since MYG Annuities are issued by insurance companies, they often offer higher interest rates, especially on longer annuity contract terms. This is because insurers typically invest in a greater mix of longer-term investments compared to other financial institutions with similar products.

Your guaranteed interest rate is locked in when you purchase the MYG Annuity contract and remains the same throughout the selected guarantee period. Unlike high-yield savings accounts or variable-rate bonds, where rates can fluctuate, you benefit from a fixed, guaranteed return.

An MYG Annuity can offer either simple interest, which is interest that’s earned but not reinvested, or compound interest. With compounding, which may occur annually or daily, your interest is reinvested and added to your original premium. Future interest is then based on the compounded amount.

An American National MYG Annuity pays an annual “effective interest rate” based upon compounding of both the principal and interest. Interest will be credited to the annuity, compounded daily, based on a 365-day year.

Certificates of deposit (CD) can also provide a fixed return, but you will pay taxes on your earnings annually, so you won’t benefit from the tax-deferral an MYG Annuity provides. To match the potential returns of An MYG Annuity, the CD would need to offer a higher interest rate to compensate for the loss of compounding through tax deferral.

For example, if someone in the 24% federal tax bracket is earning a 2.50% guaranteed rate in tax-deferred annuity, they would need to earn a rate of 3.29% in a taxable savings vehicle like a CD to equal the returns provided by the annuity.

Choosing the length of an MYG Annuity guarantee period might be determined by focusing on how you want to use the money in your future. Do you want to create guaranteed retirement income? Use as an income bridge from semi-retirement to full retirement? Or do you need a future source of money for a specific financial goal?

The longer your guarantee period, the more likely you are to receive higher guaranteed interest rates. Shorter guarantee periods, however, give you access to your money sooner. Guarantee periods can range from 3-10 years and it’s important to consider if the length of the guarantee period aligns with your financial goals.

For example, if you are planning on retiring in five years and want to use this money to help fund your retirement, a ten-year guarantee period might not fit with your strategy. But if you are in your early 50s, a ten-year guarantee period could help you accumulate enough savings to potentially retire early or partially retire. It can supplement your income until you reach full retirement age and can apply for Social Security benefits.

Remember, if your selected guarantee period ends before you turn age 59½, you won’t be able to access your money without likely paying an IRS penalty. To avoid any penalties and continue benefitting from tax-deferral, you may have the option to continue the annuity and earn a new interest rate as declared by the insurer. You can also purchase a different annuity contract or pursue a different financial strategy.

MYG Annuities typically do not have common fees associated with other accounts—such as fees for transactions, management, custodial/account, or maintenance.

A declining surrender charge penalty will apply for money taken from the MYG Annuity, as per the contract’s surrender charge schedule. However, most annuity contracts allow you to withdraw a certain percentage of the annuity value each year without penalty, typically 10%. Some contracts also provide waivers for unexpected life events, such as long-term care or end-of-life care needs. But your liquidity will be limited.

You will want to check the surrender charge schedule of your MYG Annuity. It will outline the percentage penalty associated with annual withdrawals exceeding the free withdrawal amount. Surrender charge fees often start high in the early years of the contract and decrease over time until they reach zero.

You should carefully consider the reputation of the insurer issuing the annuity. Because any financial product is only as strong as the company behind it, it’s important to consider an insurer’s financial ratings before you buy a long-term financial product.

Independent credit rating agencies evaluate a company's balance sheet, operating performance, and business profile. They consider factors such as liquidity, profitability, investments, liabilities, management, and business strategy before assigning a strength rating.

A strong company might be given an "A" rating by one of the rating agencies², while a company with good financial standing but more business risks might be given a "BBB" rating.

American National has maintained at least an A rating from the AM Best rating agency for an impressive 83 consecutive years and was one of the U.S. life/health insurers recognized for having maintained AM Best's Financial Strength Rating of A or higher for at least 75 years.

More information about American National ratings can be found here.