What Is a Fixed Annuity?
A fixed annuity lets you earn a guaranteed rate of interest without exposing your principal to market losses. A fixed annuity is a contract with an insurance company: you place money with the company, and the company credits interest at a rate set by the contract rather than by market performance. Because the rate is established before the contract begins, the account value does not fall when markets fall.
The tradeoff is straightforward. You give up the possibility of higher market returns in exchange for a guaranteed rate of interest that does not change during the guarantee period.
This article covers fixed annuities generally. For the specific type Wichita National offers, see our guide to what a MYGA is.
How a fixed annuity works
You fund the contract with a single premium. The insurance company credits interest at the guaranteed rate for the period stated in the contract. Because the rate does not change during the guarantee period and does not depend on market movement, you know from the day your contract begins what interest rate your money will earn throughout the guarantee period.
Interest is not taxed in the year it is credited. Growth is tax deferred until money is paid out, which is one of the practical differences between a fixed annuity and a bank product paying a similar rate.
Compounded Interest Vs. Simple Interest
Fixed annuities can be simple interest or compounded interest products.
Simple interest is calculated only on your original principal. The interest you earn never starts earning interest of its own, so growth remains linear over time.
Compounded interest works differently. With compounded interest, the interest your money earns is added to your balance and then begins earning interest itself. This creates a snowball effect that can meaningfully increase your total growth compared to simple interest. Wichita National’s MYGA is a compounded interest product, so your interest is calculated and credited in a way that allows your earnings to generate additional earnings throughout the guarantee period.
What a MYGA is
MYGA stands for multi-year guaranteed annuity. It is a type of fixed annuity in which a single interest rate is guaranteed for a set number of years chosen at purchase.
The distinction is worth understanding, because not every fixed annuity works this way. Some fixed annuities credit a rate the insurance company can reset periodically, often each year, subject to a minimum stated in the contract. A MYGA locks one rate for the entire guarantee period, which is what makes the outcome predictable from the first day.
In practice the terms multi-year guaranteed annuity, MYGA, and fixed-rate annuity are often used to mean the same thing.
How a fixed annuity compares to a CD
Fixed annuities and bank certificates of deposit are often considered side by side, since both pay a set rate over a set term. The differences come down to how earnings are taxed, what stands behind the guarantee, and what happens at the end of the term. We cover that comparison in detail separately.
Accessing your money before the term ends
Fixed annuities are built for money that can stay in place for the length of the guarantee period, and the contract terms reflect that. This is the part worth understanding before you buy rather than after.
Withdrawals taken during a guarantee period are generally subject to a surrender charge, which is a percentage of the amount withdrawn and declines over the term. A market value adjustment may also apply, increasing or decreasing the amount received depending on how interest rates have moved since the contract was issued. Optional riders can provide limited penalty-free access, and electing one reduces the guaranteed rate. Required minimum distributions are not subject to a surrender charge or market value adjustment.
The specific charges, schedules, and rider terms for the Security MYGA are set out in the product materials.
Withdrawals of earnings taken before age 59 and a half may also be subject to a 10 percent IRS penalty in addition to ordinary income tax. This is general information rather than tax advice.
What happens at the end of the guarantee period
When a guarantee period ends, the owner generally elects a new guarantee period, surrenders the annuity, or moves the funds into another annuity through a 1035 exchange/transfer/rollover. Contracts commonly renew automatically if no election is made, at the rate available at that time, with a new surrender charge schedule.
How fixed annuities are taxed
Growth inside the contract is tax deferred. When money is withdrawn or paid out from a non-qualified fixed annuity, meaning one funded with after-tax dollars, gains are taxed as ordinary income.
Money withdrawn from a fixed annuity held inside an IRA, 401(k), or other qualified plan is taxed as ordinary income, because those accounts are already tax deferred.
Tax treatment depends on individual circumstances. Consult a tax professional.
What a fixed annuity is not
A fixed annuity is not a bank deposit and is not FDIC insured. The guarantee rests on the financial strength and claims paying ability of the issuing insurance company and, subject to state law, protections provided by state guaranty associations.
Other categories of annuity exist and work differently. Wichita National focuses on fixed annuities, specifically multi-year guaranteed annuities, and does not offer other annuity types at this time.
Where Wichita National fits
The Security MYGA is a single premium deferred fixed annuity available in 3, 5, 7, and 10 year guarantee periods. Issue ages are 18 through 89, with a minimum premium of $10,000 and a maximum of $1,000,000.
If you are comparing guaranteed savings options, understanding how a fixed annuity works is the first step. To see how the Security MYGA is structured and what each guarantee period offers, review the product details or estimate your growth with our calculator.
Frequently asked questions
What does MYGA stand for?
Multi-year guaranteed annuity, a fixed annuity that guarantees one interest rate for a set number of years.
Is a MYGA the same as a fixed annuity?
A MYGA is a type of fixed annuity. The difference is that a MYGA guarantees a single rate for the full term rather than a rate that may reset periodically.
Are fixed annuities safe?
Fixed annuities are designed to protect principal from market losses while providing a guaranteed rate of interest. Guarantees are backed by the financial strength and claims paying ability of the issuing insurance company and, subject to state law, protections provided by state guaranty associations.
Is a fixed annuity FDIC insured?
No. FDIC insurance covers bank deposits. A fixed annuity is backed by the issuing insurance company and, subject to state law, protections provided by state guaranty associations.
Can I take money out before the term ends?
Yes, but a surrender charge and possible market value adjustment generally apply during the guarantee period unless a free withdrawal rider is selected during the application process. Required minimum distributions are not subject to either.
What is the minimum to open a Security MYGA?
The minimum single premium is $10,000 and the maximum is $1,000,000.
