vineviz wrote: ↑Mon Aug 10, 2020 6:44 am
TN_Boy wrote: ↑Sun Aug 09, 2020 10:40 pm
I don't understand the posters here who keep saying these things have a very small amount of risk. How do you know that?? I guess if you contact an agent they will send you detailed information and maybe you can see more about how they work. Or you are just certain the guaranteeing entities will have no issues if there is a problem (what evidence is there that this is the case?).
Insurance isn't a new industry, so people familiar with the way that insurance companies are structured and operate are generally familiar with the relative risks. As a type of investment
, MYGAs are very safe.
However, and I think this has been pointed out before, not all insurance companies are equally
safe. This is where the ratings, like those provided by AM Best, come in. I mean, your normal TANSTAFL instincts should kick in at some point anyway (if you see that some MYGAs are paying 1% and others are paying 3.5%, you can infer those products are not equally
risky) but you don't need to rely on intuition.
If you buy insurance from a company rated "B+", you are in the third tier ("Good") on financial strength. The long-term annual average failure rate of such companies is about 2%: in a financial crisis it would likely be higher, and in "normal" years it will likely be lower.
I, personally, would NOT buy a MYGA from a company with a rating that didn't start with an "A".
And definitely not in a state like California where the "guarantee" is only 80% of the value of the annuity.
But if I did, I'd spread the risk: in my state there are 8 different insurance companies with B+ or B++ rates offering 5-year MYGAs with relatively low minimums. Spread a $50k purchase across 5 or 6 different insurance companies if you want to reach for the highest yields. Or else be content with the 1.5% to 2.5% you can get from A or better rated companies.
Well, if the guarantees are good (forget CA, let's go with other states), why not just go for the highest paying MYGA(s)? Buy 5 of the highest yielding!
If the guarantees are not
good, then there is more risk than you say, regardless of the rating of the company at the time you buy the MYGA.
I mean, basically you are buying a zero coupon "bond" from a company, that happens to be an insurance company, and there is industry group backing/guarantee, under some state regulation, yes? And the "bond" is relatively illiquid.
So one I found, Delaware LIfe, A- rated, pays 2.55 for 5 years. It wasn't clear what the death benefit was; it seemed from the description that in some states you might need a rider (which presumably would cost a bit) to ensure that beneficiaries get the full value at the time of the death.
In comparison you could look at Vanguard's Intermediate-Term Investment-Grade Fund Investor Shares, with a duration of 5.7 years, SEC yield 1.43%
So, I don't know, would I rather have a "guaranteed" 2.55% on money tied up for five years, or a diversified bond fund yielding 1.43% (and that yield may very well go down.....). I don't like either option, personally, but the MYGA doesn't scream buy to me.
And I'd never go all in on these things, so then the question becomes, how useful is an extra 1% or so on X percent of my fixed income holdings
? It's not going to make a meaningful difference in my portfolio value, and I have a relatively conservative portfolio.
I can't see them being useful to me (the risk versus extra reward is not interesting). But a lot of people are looking at fixed income rates and panicking a little. Such people should read the description of the MYGA (including death benefits) and the state association guarantees very closely. Maybe they work for those people.