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Customizing Your Fixed Annuity

Jan 18, 2023

Blueprint Income Team

There are many features you can add to your fixed annuity so it best fits your needs. We’ve broken down the options you can select to customize your fixed annuity.

  • There are lots of options to customize your fixed annuity so it fits your needs
  • The fixed annuity features you select can impact your guaranteed rate
  • You can open policies that allow for free withdrawals, market-value adjustment, and additional riders 

fixed annuity (MYGA) is a tax-deferred retirement savings vehicle that provides fixed asset accumulation, much like a CD. With a fixed annuity, you can invest your savings over a specified time horizon (typically 3 to 10 years), earning a fixed return. The interest earned in your fixed annuity is not taxed until withdrawn, and your principal is guaranteed.

Fixed annuities are relatively simple investments, but there’s still some terminology, features, and riders that you’ll need to understand. We’ve outlined some key concepts for you here.

Interest Rates

When you buy a fixed annuity, you are locking in a return that’s guaranteed for the contract term. The fixed annuity could be structured to offer the same crediting rate every year or a different rate in the first year, which is higher than in subsequent years. Ultimately, and assuming you won’t be cashing out early, what matters is the yield to maturity/surrender, or the annual effective return you’re earning over the full locked-in period. Finally, at the end of the contract, you’ll have the option to continue the fixed annuity with an annually renewable rate. Here’s how the rates will be identified:

  • Base Rate: annual interest rate that will be credited to your account during the contract term
  • Additional First Year Interest Rate Bonus: additional interest rate that might be added to the base rate in the first year
  • Yield To Surrender/Maturity: the effective annual interest rate when spreading the bonus rate evenly over every year
  • Renewal Rate: after the contract term ends, your money will continue to earn interest at the prevailing renewal rate, which moves according to market conditions
  • Guaranteed Minimum Renewal Rate: the lowest renewal rate possible (floor)

Surrender/Contract/Guarantee Period & Rates

The contract term for a fixed annuity is actually the period during which surrender charges apply. During these years, if you withdraw more than what’s allowed – typically 10% of your account value – fees will be assessed. Most fixed annuities have pre-set declining surrender charge schedule which can start as high as 10% in the first year and will then decline by typically 1% per year. Here’s how the surrender charge period will be identified:

  • Surrender Charge Period: years during which you’ll be charged to access anything greater than the free withdrawal
  • Surrender Charges: Rates applied to amount surrendered above free allowance for each year of the surrender charge period

Note that typically the surrender charge period will be the same as the rate guarantee period, but products are occasionally structured to have a longer surrender charge period. In this case, the guaranteed rate will be in effect for only a few years, after which you’ll earn the renewal rate until the surrender charge period ends. This option could make sense if you expect interest rates to increase, but it’s generally not something we’d recommend.

Free Withdrawals

Fixed annuities typically allow you to access a portion of your money penalty-free. The allowance will differ from carrier to carrier, but it’s often 10% of the account balance. You should only plan to take advantage of these withdrawals if you’re at least 59½, as the IRS imposes a 10% penalty on withdrawals made before you reach that age.

Note that if your fixed annuity is qualified and was purchased within a 401(k) or IRA, any applicable required minimum distributions will be withdrawable penalty-free.

Market Value Adjustment vs. Book Value

There are two types of fixed annuities: those with a market value adjustment (MVA) or without, known as book value (BV). The MVA or BV classifications only impact you if you decide to withdraw funds early. In the case of a book value fixed annuity, the amount you’re able to withdraw will simply be the account value less surrender charges described above. However, a fixed annuity with a market value adjustment could reduce the amount you’re able to access upon surrender.

The market value adjustment will, as the name suggests, adjust the amount you’re able to surrender based on market conditions at that time. If interest rates have gone up since purchase, an additional fee will be assessed that lowers the withdrawal value. The reverse is also true. If interest rates have gone down since purchase, the amount you’re able to withdraw will actually increase.

While seemingly bizarre, fixed annuities with MVAs are actually very common and well-liked, offering higher interest rates than their BV counterparts. The market value adjustment protects the insurance company from adverse behavior by charging you for surrendering in a rising rate environment. That’s because the insurance company would otherwise lose money liquidating assets to fund your surrender (bond prices go down when interest rates go up). Having this downside protection means they can offer you a higher rate.

For example, let’s assume that Kelli decides to surrender her 5-year Fixed Annuity with MVA at the end of year 4 to take advantage of the increasing interest rate environment. To measure the change in interest rates over those 4 years, the insurance company uses a corporate bond index. At purchase, that index showed a rate of 3%, which 4 years later has increased to 5%. For simplicity, we’ll assume that the insurance company calculates the MVA adjustment as {(1 + Initial Index)/(1+ Current Index) – 1}, which in this case produces {1.03/1.05 – 1}, or -0.019.

At the end of year 4, Kelli’s Fixed Annuity is worth $116,986, of which she’s allowed to take 10%, or $11,699 for free. The rest, $105,287, will be subject to a surrender charge and the MVA adjustment calculated above. If the applicable surrender charge rate is 2%, then Kelli’s charges would be:

Surrender: -0.02 * $105,287 = -$2,106 MVA: -0.019 *$105,287 = -$2,005

giving her a net surrender of $116,986 – $2,106 – $2,005 = $112,875.

Market-Value Adjusted Surrender Calculation

MVA calculation for illustration purposes only and not representative of any particular insurance company’s process. Assumes $100,000 5-year MVA accumulates at 4.00% per year, 10% free withdrawal provision, and year 4 surrender charge of 2%. Makes use of simplified MVA of (1 + Purchase Index)/(1 + Today’s Index) - 1, with assumed index of 3% at purchase and 5% today.

Note that this is a basic, simplified illustration of the MVA functionality. Each insurance company will have its own formula and underlying index. Also not illustrated here but potentially applicable is a floor for the surrender value of the premium accumulated at the guaranteed minimum interest rate in the contract.

Finally, some fixed annuities offer a return of premium (ROP), which guarantees that you’ll always be able to get at least your original premium out of the contract at any time. In other words, surrender charges and market value adjustments will be capped at the interest you’ve accumulated.

Payout Options

When your contract matures, you have several options:

  • Lump-Sum Withdrawal: you can take the entire balance of your matured fixed annuity in a one-time payment
  • Periodic or Scheduled Withdrawals: you can leave your money in the fixed annuity earning the renewal rate and withdraw as needed or following a pre-determined schedule
  • Annuitization: you can convert your account balance into a Single Premium Immediate Annuity (SPIA) that offers a guaranteed lifetime paycheck you can’t outlive
  • Rollover: through a 1035 exchange, you can rollover your fixed annuity into another annuity, fixed annuity or otherwise, penalty- and tax-free


While it varies from carrier to carrier, fixed annuities can offer riders that are either included or added to the contract at an additional cost. Here are some of the options you might see:

  • Living Needs Benefit/Unemployment Rider: Should you start living at a health care facility, become terminally ill, become disabled, or lose your job, additional or full liquidity of your contract will be available.
  • Home Health Care Rider: If you begin to receive home health care recommended by your doctor, you may be able to access your balance without penalty.
  • Interest Opportunity Rider: For a fee or a lower guaranteed rate, you may be able to participate in a rising rate environment.
  • Enhanced Beneficiary Benefit Rider: Your beneficiaries may receive additional funds to help offset death expenses, such as tax obligations.
  • Enhanced Spousal Continuation Rider: If your spouse is your sole primary beneficiary, he or she can continue your policy upon your death as the new owner

Ready to get your fixed annuity rates? Visit our annuity calculators page. If you are looking for more personalized information on fixed annuity features, email us at support@blueprintincome.com.

Blueprint Income Team

We are a team of finance, insurance, and actuarial professionals working to make it easier for everyone to achieve a steady and comfortable retirement. We write about annuities (the good and the bad) and provide strategies to help Americans prepare for retirement.


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