Understanding Fixed Annuities and MYGAs

The Basics

What is a fixed annuity and how does it work?

A fixed annuity is an insurance contract where you give an insurance company a lump sum (the premium), and in return they guarantee a fixed interest rate for a set period. Your principal is protected from market losses. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.

Fixed annuities are not bank products, not stocks, and not mutual funds. They are insurance contracts regulated by state insurance departments. When you purchase a fixed annuity, the insurance company invests your premium in their general account (primarily bonds and mortgages) and guarantees you a stated return regardless of how those underlying assets perform.

The most common type is the Multi-Year Guaranteed Annuity (MYGA), which works similarly to a bank CD but is issued by an insurance company instead of a bank.

How It Works

What happens after you purchase a fixed annuity?

During the accumulation phase, your money grows at the guaranteed rate, tax-deferred. At the end of the term, you can withdraw, renew, or convert to income payments. Most contracts allow 10% penalty-free withdrawals annually during the term.

The accumulation phase

Your premium earns the guaranteed interest rate. Interest compounds tax-deferred — you do not pay taxes until you withdraw. This is one of the key differences from a bank CD, where interest is taxed annually.

Surrender charges

If you withdraw more than the penalty-free amount (usually 10% per year) during the surrender period, you pay a surrender charge. These charges typically start at 5–8% and decline each year until they reach zero. After the surrender period, you have full access to your money.

At maturity

When the term ends, you typically have several options: take the full amount as a lump sum, renew into a new annuity, transfer to a different carrier (a 1035 exchange, which is tax-free), or convert to a stream of guaranteed income payments.

Terms, surrender schedules, and options vary by carrier and product. This is a general overview for educational purposes only.

Benefits and Limitations

What are the pros and cons of fixed annuities?

Fixed annuities offer guaranteed rates, tax-deferred growth, and principal protection. The trade-offs include limited liquidity during the surrender period, no FDIC insurance, and potential tax penalties for early withdrawals before age 59½.

Potential benefits

Guaranteed rate — Your interest rate is contractually guaranteed for the full term.
Principal protection — Your deposit cannot lose value due to market fluctuations.
Tax-deferred growth — No taxes on earnings until you withdraw.
Probate avoidance — Passes directly to named beneficiaries.
No cost to purchaser — The insurance company pays the broker commission from its own margin.

Important limitations

Not FDIC insured — Guarantees depend on the issuing carrier's financial strength.
Limited liquidity — Surrender charges apply to early withdrawals beyond the free amount.
Tax penalties — Withdrawals before age 59½ may incur a 10% IRS penalty in addition to ordinary income tax.
Inflation risk — A fixed rate may not keep pace with inflation over long periods.
Opportunity cost — Money in a fixed annuity cannot participate in stock market gains.

Common questions

How is a MYGA different from other fixed annuities?+

A MYGA (Multi-Year Guaranteed Annuity) locks in a specific interest rate for a set number of years. Other fixed annuities may have rates that adjust annually based on the carrier's declared rate. MYGAs offer the most rate certainty.

What is the minimum amount needed to buy a fixed annuity?+

Minimums vary by carrier, typically ranging from $10,000 to $25,000. Some carriers offer products with lower minimums. An independent broker can identify products that match your available funds.

How are fixed annuity earnings taxed?+

Earnings grow tax-deferred. When you withdraw, the earnings portion is taxed as ordinary income. The original premium (your cost basis) is not taxed again. Washington state has no income tax, so WA residents pay only federal tax on withdrawals.

What happens if the insurance company goes bankrupt?+

Insurance companies are regulated by state insurance departments and must maintain reserve requirements. If a carrier becomes insolvent, state guaranty associations provide a safety net, though coverage limits and processes vary by state.

Can I move my annuity to a different company?+

Yes. A 1035 exchange allows you to transfer an annuity from one insurance company to another without triggering a taxable event. This can be useful if another carrier offers a better rate at renewal time.

What is a free-look period?+

Most states, including Washington, require a free-look period (typically 10–30 days) after purchasing an annuity. During this time, you can return the contract for a full refund if you change your mind.

Understanding fixed annuities and how they work.