Health insurance, not life insurance. You can go at it alone, and maybe be healthy and pay $0 in costs or maybe get hit with a $50,000 hospital bill. Or with health insurance, you pay a (relatively) small fixed amount, and then it doesnt matter what bills you incur.
Same idea (although inverted) with a MYGA - you might be able to get a little better return on your own, or you can ‘pay’ a small portion of that potential to get a fixed return where the company absorbs the downside risk across all it’s investments.
I believe the “market value adjustment” (MVA) described in the link previously is going to hit you for the value of the bond market move, which is what you are seeing in this year’s drop in that ETF. So it reads like you pay 3-9% surrendering fees and also the 7% market value drop if you bought at the start of this year. Do note the ETF has paid 1% in dividends so it’s really only down 6-7% rather than 7-8%.
But you’d be right to take out the max 10% + interest when this happens and reinvest at higher prevailing rates. There may be some IRA angles where you take out your RMD too, which I read is often also penalty free, before those charges apply.
Said another way, I bet MYGA rates were a lot lower at the start of this year (just like mortgages, treasuries, CDs) before the Fed when on their rampage against inflation. If they are a constant spread over treasuries, the 1,75% move in the 3-5 year treasuries from Jan’22 til now means the 4.4% now would have been more like 2.65% back then. Here was a guy who bought them a few years ago
[late 2020] I think that a 3.50% interest rate from Canvas on a 7 year MYGA is very attractive.
So if you bought the ETF back then and assuming a 2.65% YTM for a 5 year hold back then in line with similar MYGA pricing, you would expect to get about 13.25% after 5 years and with 4.5 years left at now at 4.4% (due to rising rates) that’ll get you 20.25% which is just enough to bring you back to 13.25% after being -7% in the hole.
So you could just wait and you’d end up where you wanted from the start with the ETF (again absent any credit defaults), but what you don’t see with the MYGA (unless you check on MVA withdrawal fees) is the mark to market on your investment.
I don’t find this “comforting” in the same way buying a 1.5% 5 year unbreakable CD 6 months ago would be marked underwater under a reasonable model of interest rate shifts, but you don’t see that so you can feel good about it (or at least as good as you can feel while missing out on higher rates available now and in the face of even higher inflation…).
This is why I was asking if there was any “insuring” going on in these products vs just investment pass through returns with a minor tax shield. The answer is yes, and that’s why you get hit with pre-retirement tax penalties on the earnings if you don’t keep 1035’ing them.
Looks like Guggenheim had a pretty low credit rating and only got upgraded to tolerable due to being acquired and now being part of some larger, not obviously insurance related company.
And it was a dog before that and got merged into something else too.
The insurer was placed into rehabilitation in December 2008 as the company’s claims-paying ability was jeopardized by its relatively high levels of exposure to subprime-related investments. A liquidation process commenced more than one year after the Guggenheim Life & Annuity agreement closed.
I mean, this CEO is the guy you trust to steer your capital through the troubled waters of the upcoming recession, right?
I’m sure all this is baked into the AM best rating, but just to give you some background. Worth noting that this Guggenheim product isn’t sold in NY, where the state regulators have higher than average insurance underwriting standards, so it’s not just me hating on annuities.
How is the Agent Compensated?
We pay commissions and other sales expenses from our general assets and revenues. Through careful calculations and pricing, we establish the price of an annuity contract, which includes the compensation we pay for the sale of the annuity contract. This pricing also covers the cost of contract guarantees, other costs such as the design, manufacture and service of the contract, as well as the investment management needed to support the contract’s values. Agents earn a commission for each annuity contract they sell… The commissions paid to the agent will not be deducted from the account value
And don’t forget due to the insurance aspect, you get hit with 10% tax penalty on the earnings if you’re not retirement age unless you keep rolling it over into more annuities.
there is a 10% tax penalty on any withdrawals from a taxable annuity prior to age 59.5. So, for example, if you buy a 5 year MYGA at age 50, you’ll need to do a 1035 exchange of the whole annuity (principal plus interest) into another annuity to avoid the tax penalty.
But look at the bright side. Let’s say that you buy a 5 year MYGA paying 2.50%. If you pay a 10% tax penalty, that would reduce the effective interest rate to 2.25%. That’s still an attractive rate compared to a CD…
As I mentioned above, this is not a product you should consider if you don’t intent to hold to maturity (or beyond the allowed penalty-free withdrawals).
