Recent yields on fixed rate annuities, also called multi-year guaranteed annuities (MYGAs), have become increasingly attractive for investors as interest rates have declined. While other similar 5-year “guaranteed” investments like Treasuries and CDs are yielding up to about 1%, a number of insurance companies are offering 5-year fixed rate annuities today that have yields just over 3%.
You read that right: You can get a MYGA yielding about eight times more than a more traditional guaranteed investment. While MYGAs are generally less liquid than Treasuries and CDs since they typically have high surrender charges on early withdrawals, MYGA rates seem almost too good to be true.
Some people that see rate differentials are probably thinking that while the MYGA rate is guaranteed, there’s still some risk there. While that perspective is technically true, since even governments have defaulted on their loans (and along those lines insurers could theoretically too), before dismissing MYGAs (or any annuity) as unsafe, it’s important to understand how the guarantee works with an insurance product such as an annuity.
The first line of defense should an insurance company go into liquidation is the insurer’s assets. It is relatively rare for an insurer to go into liquidation, and even if the insurer does, that doesn’t mean the annuitant loses money.
For some perspective, according to A.M. Best’s Impairment Rate and Rating Study, between 1977 and 2018, no A++ rated insurer went into liquidation up to 15 years after receiving the A++ rating. Even for B rated insurers, the historical cumulative probability has only been 4.78% at 5 years, 7.68%% at 10 years and 9.59% at 15 years.
A comparison of assets to expected liabilities is a primary driver of the financial strength rating of an insurance company. A company with a lower rating will have a lower asset surplus and lower quality underlying assets, and thus will be more vulnerable to eventual liquidation.
Not surprisingly, financial ratings also correlate to MYGA payouts. A++ rated companies like New York Life and MassMutual only offer 5-year MYGAs with yields around 1.5%, but insurers rated B++ have yields that can exceed 3%.