What Is a Multi-Year Guarantee Fixed Annuity? - dummies

What Is a Multi-Year Guarantee Fixed Annuity?

A multi-year guarantee (MYG) fixed annuity is like a fixed-rate mortgage in reverse. You give a specific amount of money to an insurance company, and the insurer guarantees that your investment will earn a specific rate of compound interest for a specific number of years.

MYG annuities are often called CD-type annuities or tax-deferred CDs because they serve the same purpose as a certificate of deposit (a CD is a security purchased at a bank that pays a fixed rate of interest for a specific number of months or years).

The beauty of MYGs is their transparency. What you see is what you get. You know the rate of interest your money will earn and how long it will earn that rate. So, if you want to buy a $30,000 boat in ten years, you can plunk down $19,500 today in a ten-year MYG annuity that pays 4.5 percent. In ten years, you can pay cash for the boat and have enough money left over for dinner for two at the marina.

Investment advisers often recommend MYG fixed annuities over single-year guarantee contracts because MYG contracts are more predictable. There’s no risk that the insurance company will reduce the interest rate after the first year.