Thoughts on a 2.1% 3 year fixed annuity

[GNXGuy]

Not a big fan on annuities , but was looking around for a CD for my mother's Trust and my banker mentioned this. Best CD rate I can find locally is 1% and on line at Ally 1.29%. This fixed annuity pays 2.1% tax deferred. Mother will NOT need any of the funds during the 3 year period.

Was considering this 3 year 2.1% fixed rate principle guaranteed annuity for my mother.

What are your thoughts / questions to ask?

Thank you

Here is more info:

https://www.globalatlantic.com/sites/default/files/upload/files/FA7235-2_4-17_SF3ProdDet_100786-5.pdf

https://www.globalatlantic.com/sites/default/files/upload/files/FA7234-2_4-17_SF3ClientGd_100785-5.pdf

 

[njhowie]

Ask banker to disclose how much money they are receiving as commission/fee from the insurance company for your purchase.

Also note that your documents indicate in a couple places:

Guarantees are based on the claims-paying ability of Forethought Life Insurance Company

 

[PatrickA5]

I recently bought a 2%, 3yr fixed annuity from Mass Mutual. My only question would be how strong is this insurance company? Assuming it's strong, I'd go for it. Can't find any CD's paying close to that.

 

[zinger1457]

Don't know much about MYGA's but you might want to shop around for better rates and insurance company ratings. Looking at the list provided on the link below the rates offered are all over the place.
https://www.immediateannuities.com/deferred-annuities/

 

[Dtail]

I recently bought a 2%, 3yr fixed annuity from Mass Mutual. My only question would be how strong is this insurance company? Assuming it's strong, I'd go for it. Can't find any CD's paying close to that.

Same here, but the rate dropped to 1.9% when I got it for my parents.
Mass Mutual/NY Life are highly rated companies, which could really matter in the coming year more so.
You can get better rates, but the ratings will be lower and in times like these as in 2008, the rating agencies are usually behind on their ratings with companies being solvent.
Yes, the (Fidelity) rep got a commission, but it is already factored into the MYGA yield. So if the yield you are seeking works for you, I wouldn't care too much about the commission side.

 

[OldShooter]

... What are your thoughts / questions to ask? ...

I am not an annuity guy but when I have had occasion to check them out, I have found it very illuminating to text search the prospectus for terms like "fee," "charge," "charges," "penalty," ...

I also tell students in my adult-ed investing classes that rule #1 is: "Never buy something that you don't understand." One time I looked at a prospectus for a variable annuity; it ran to 208 pages of fine print. Forget the customer ever understanding; even the salesperson is not going to have a good understanding of a product like that. The text search was quite illuminating too.

 

[MRG]

I recently bought a 2%, 3yr fixed annuity from Mass Mutual. My only question would be how strong is this insurance company? Assuming it's strong, I'd go for it. Can't find any CD's paying close to that.

+
Thanks for the idea. I borrowed it and did the same.

 

[Dtail]

I am not an annuity guy but when I have had occasion to check them out, I have found it very illuminating to text search the prospectus for terms like "fee," "charge," "charges," "penalty," ...

I also tell students in my adult-ed investing classes that rule #1 is: "Never buy something that you don't understand." One time I looked at a prospectus for a variable annuity; it ran to 208 pages of fine print. Forget the customer ever understanding; even the salesperson is not going to have a good understanding of a product like that. The text search was quite illuminating too.

The variable annuities are not good in general and can be complicated.
However the fixed deferred annuity such as a MYGA is not a complicated product.
There can be a couple of downsides vs. a CD.
1) No FDIC type insurance, but that is why one shouldn't stray too far from A++ companies.
2) Much more severe penalties if taking the monies before the end date.

However in periods of low yields, the yields are clearly higher than comparable brokered CD's.

 

[OldShooter]

The variable annuities are not good in general and can be complicated.
However the fixed deferred annuity such as a MYGA is not a complicated product.
There can be a couple of downsides vs. a CD.
1) No FDIC type insurance, but that is why one shouldn't stray too far from A++ companies.
2) Much more severe penalties if taking the monies before the end date.

However in periods of low yields, the yields are clearly higher than comparable brokered CD's.

To be clear, I am not arguing for or against this idea. I am arguing, though, that no one should buy any kind of a complicated product unless they thoroughly understand it. Not from the colored brochures, but from the legal disclosures.

 

[PatrickA5]

To be clear, I am not arguing for or against this idea. I am arguing, though, that no one should buy any kind of a complicated product unless they thoroughly understand it. Not from the colored brochures, but from the legal disclosures.

+1

The MYGA document I read was pretty straightforward and easy to comprehend. The only part that was a little complex was the part that allows for penalty free withdrawals for nursing home, hospital stays, etc. The "meat and bones" is pretty simple.

 

[pb4uski]

To be clear, I am not arguing for or against this idea. I am arguing, though, that no one should buy any kind of a complicated product unless they thoroughly understand it. Not from the colored brochures, but from the legal disclosures.

These are not at all a complex product. Basically a CD with surrender penalties defined as a stated percentage rather than a number of days interest. As you say, you aren't an annuity guy.

As for the OP, if the choice is between 2.1% from Forethought Life or 1.9% from Mass Mutual, I'd take Mass Mutual any day of the week.

 

[Perryinva]

The surrenders can be higher than you would expect. The 5 siblings have an inherited 8 (?) year annuity (Pacific Life) that DF bought 6 years ago, 2.5%, each worth about $47k on the statement. 3 siblings cashed theirs in immediately and the payoff was some $6000 below stated value, and was $2000 below what the stated surrender value on the statement was! I asked them to find out what the breakdown was, but they weren’t interested. As far as they were concerned it was free money, no matter how much they got. Since it matures fully in 2022, the last 2 of us ( by WAY far the most financially secure) just let it ride. Seems like the old man made a decent decision considering he only had a 3rd grade education and was in his mid 70s.

 

[Dtail]

The surrenders can be higher than you would expect. The 5 siblings have an inherited 8 (?) year annuity (Pacific Life) that DF bought 6 years ago, 2.5%, each worth about $47k on the statement. 3 siblings cashed theirs in immediately and the payoff was some $6000 below stated value, and was $2000 below what the stated surrender value on the statement was! I asked them to find out what the breakdown was, but they weren’t interested. As far as they were concerned it was free money, no matter how much they got. Since it matures fully in 2022, the last 2 of us ( by WAY far the most financially secure) just let it ride. Seems like the old man made a decent decision considering he only had a 3rd grade education and was in his mid 70s.

Agree the high surrender value is a risk. However if one was to purchase a CD, whether brokered or bank and was 100% sure the monies would not be needed until maturity, with current yields, the MYGA is another decent choice for the bond portion of one's AA.

 

[OldShooter]

... As you say, you aren't an annuity guy. ...

Yup. Exactly. That's why they look simple to an insurance guy like you and complex to a civilian like me (and many others IMO).

 

[pb4uski]

Agree the high surrender value is a risk. However if one was to purchase a CD, whether brokered or bank and was 100% sure the monies would not be needed until maturity, with current yields, the MYGA is another decent choice for the bond portion of one's AA.

Especially if in a taxable account and managing income for ACA or college funding or the like are in play.

 

[Chuckanut]

There is a psychological value to having some income protection that is provided by a annuity. If having a good part of one's ongoing costs covered by an annuity kept one from panicking and selling out in the later half of March, that's a big plus.

Not everybody is as calm, cool and collected as the financial mavens on this site.

 

[capjak]

MYGAs are the insurance equivalent of a Bank CD, both have penalties if surrendered early (MYGAs are much higher), however many MYGAs allow 10% and/or interest accrued to be taken each year with Zero penalty.

I purchased a 5 year paying 2.65% from Mutual of Omaha AM best A+ rated and 7 Year paying 3.5% from Midland AM Best A+ rated. For 3 year there was a A+ rated for 2.25%. Again don't purchase if you need to use the money before the period is up or make sure the one your purchase allows for penalty free withdrawal as the ones I purchased.
All earned interest is tax deferred until the MYGA matures.

 

[Chuckanut]

Here's one person's view on fixed annuities in these days of low interest rates:

https://humbledollar.com/2020/06/fa..._RilH8G7RXjjUVYDm7L9qBQHAK8uNsH89GT3DboOkS9Vk

The comment on annuities is one of four areas that Mr. Clements believes we need to rethink.

Falling interest rates have hurt the payout on both bonds and immediate fixed annuities—but it’s hurt immediate annuities far less. As I explained in one of March’s newsletters, interest rates are just one element in the pricing of immediate annuities. The other key component is life expectancies, and those have barely budged. Result: While 10-year Treasury yields today are at less than half of year-end 2019’s 1.92%, payouts on immediate annuities have dropped only slightly, making them a good choice for retirees who need to squeeze more income out of their retirement savings.