Simple vs. Compound Interest Annuity
Jason Stolz CLTC, CRPC
When deciding between a simple vs. compound interest annuity in the MYGA world, the best choice usually has less to do with the final “headline” maturity value and more to do with how you expect to use the contract during the guarantee period. Two annuities can be structured to land at a similar end value at maturity, but the path the value takes to get there can be very different. That path affects interim account value, the size of penalty-free withdrawals, interest-only income patterns, and what happens if the owner dies before maturity.
In other words, the question isn’t just “Which grows more?” It’s “Which one fits my timeline and how I’ll actually use the annuity?” If you want the cleanest way to compare options, start by looking at current MYGA rates by term, then compare illustrations that show year-by-year values. You can see the current landscape here: current annuity rates.
At Diversified Insurance Brokers, we help clients compare the most important variables side-by-side: year-by-year values, surrender schedules, penalty-free access features, and beneficiary outcomes. The goal is to avoid a common mistake: choosing a contract based on a single maturity number when your real-world plan depends on what happens in years 1–(term-1).
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What’s the Real Difference Between Simple and Compound Interest in a MYGA?
Simple interest typically means the contract credits interest based on the original premium (the initial deposit). The crediting rate is applied to the same starting base each year. That often creates a growth pattern where year-by-year values are higher early in the term, because the design is front-loading the path of accumulation relative to an equivalent maturity value target.
Compound interest typically means interest is credited on a growing base. The credited interest becomes part of the account value, and future interest is calculated on that larger amount. Even if the maturity value ends up similar in a “designed-to-match” comparison, the path can be different: the compound design can show lower interim values early and then catch up later as compounding builds on itself.
The practical takeaway is simple: if you care about what the annuity looks like in years 1–4 of a 5-year term (liquidity, interest-only income, potential surrender values, or interim death benefit outcomes), the “simple vs. compound” structure can matter even if the end value is similar.
Why the “Path” Matters in Real Life
People do not always hold a MYGA all the way to maturity. Even if you plan to hold to maturity, real life can introduce a reason to access funds: a home purchase, a move, a vehicle, a family support need, a healthcare event, or a desire to reposition assets. MYGAs often include penalty-free withdrawal options, and the annual free amount is typically calculated as a percentage of the contract value or accumulation value (details vary by carrier and product).
If one design shows higher year-by-year values early in the term, it may translate into more flexible dollar amounts within the penalty-free window and potentially a higher value on certain contract metrics. That doesn’t mean “simple is always better.” It means you should compare based on your actual use case.
Illustrative 5-Year Example (Same Target Maturity Value)
This is a conceptual illustration to show the pattern. The point is not the exact numbers. The point is that the interim values can differ even when the end value is designed to be similar at maturity.
| Year | Simple-Interest Pattern | Compound-Interest Pattern | Why It Can Matter |
|---|---|---|---|
| 1 | Higher interim value | Lower than simple | Penalty-free withdrawals and interim access can be impacted by value. |
| 2 | Higher interim value | Lower than simple | Interest-only income patterns can differ depending on design. |
| 3 | Higher interim value | Lower than simple | If death benefit is based on account value, beneficiaries may see differences. |
| 4 | Higher interim value | Nearing parity | The gap often narrows as maturity approaches. |
| 5 | Equal maturity value | Equal maturity value | Both can be engineered to land at a similar maturity number. |
Important: actual values, surrender schedules, and death benefit mechanics depend on the specific carrier and contract. Always compare a full illustration and policy provisions.
When Simple-Interest MYGAs Can Shine
A simple-interest MYGA structure can be especially attractive when your plan depends on what happens during the term rather than only at the end of the term. In many “designed-to-match” scenarios, the simple-interest design shows higher interim account values in early and mid years. That can be meaningful in three common use cases.
Interest-only income. Some MYGA owners want predictable, interest-oriented cash flow. In certain designs, interest credited on the original premium can create a straightforward interest-only pattern that feels easier to plan around. This is particularly relevant if you intend to take periodic interest withdrawals while keeping principal intact.
Interim liquidity. If you anticipate using penalty-free withdrawals (commonly up to 10% annually, depending on the product), a higher interim value can translate into larger dollar amounts within the free-withdrawal window. Even when you do not expect to use it, many retirees like knowing the feature is there if life changes.
Interim death benefits. Many annuities pay beneficiaries an amount tied to contract value (how that is defined can vary). If the death benefit is connected to account value during the term, higher interim values can be a meaningful difference if death occurs before maturity.
Free-withdrawal provisions and death-benefit mechanics vary by carrier and may be affected by optional riders. Surrender charges and market value adjustments (MVA) can apply to withdrawals above the free amount.
When Compound-Interest MYGAs Can Be the Better Fit
A compound-interest MYGA can be a strong fit when your plan is truly “hold to maturity” and your priority is maximizing the maturity outcome under a straightforward accumulation mindset. Some compound designs also pair well with certain carrier-specific features or options (for example, renewal characteristics, specific liquidity provisions, or internal product architecture that is more common on compound-rate MYGAs).
Hold-to-maturity investors. If you are confident you will not need interim withdrawals, the interim-year value differences may be less important. The decision then becomes more about the net rate, the term you want, and the carrier/product characteristics that matter most.
Contract alignment. Some riders, features, or product variations work more efficiently on specific contract designs. If a rider reduces the base crediting rate or affects how interest is handled, you want to compare net results rather than assuming one structure is always superior.
The most reliable approach is to compare two illustrations the way you would compare two routes on a map: look at where each route takes you at different checkpoints, not only the final destination.
Picking the Right Term (And Why Term Choice Can Matter More Than Simple vs. Compound)
Even a perfect simple-versus-compound decision can be undermined by the wrong term length. Term choice changes your rate, your maturity schedule, and how quickly you can reposition if rates change. It also changes the surrender schedule timeline and the cadence of when your money becomes fully liquid again.
If you’re rate-shopping, compare term-specific landscapes first. These pages help you see what is competitive right now by duration:
- Compare today’s best 3-year MYGA rates
- Check competitive 4-year annuity rates
- See the best 5-year annuity rates and terms
- Check competitive 6-year MYGA rates
- Explore leading 7-year MYGA rates
- Review top 10-year annuity rate options
Once the term landscape is clear, then compare simple versus compound structures within the term you are considering. That sequence keeps the decision grounded in real options available today.
Shopping Checklist: How to Compare MYGAs Like a Pro
When you compare MYGA options, you can move quickly if you keep the process tight and structured. A strong comparison usually comes down to five areas.
- Define your use case: hold to maturity, interest-only income, or occasional penalty-free withdrawals.
- Compare the path, not just the end: look at year-by-year values and likely cash-flow patterns.
- Price optional features carefully: if something adds value, make sure you understand the net impact on crediting.
- Understand surrender and MVA provisions: early withdrawals above the free amount can change outcomes.
- Confirm beneficiary mechanics: understand how the contract pays out during the guarantee period.
Most “bad annuity experiences” are not caused by annuities. They’re caused by mismatched expectations—choosing a contract that doesn’t match how the client intends to use the money. A simple-versus-compound comparison helps prevent that mismatch.
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FAQs: Simple vs. Compound Interest Annuity
Do simple-interest MYGAs always have higher returns?
No. They often show higher interim values during the term, but a rate-equivalent compound MYGA can finish with the same maturity value. The difference is the path of growth, not necessarily the end result.
Which is better for interest-only income?
Simple-interest MYGAs typically provide a steadier, often larger interest-only payment during the term because interest is credited on the original premium. Always compare your specific term and rates.
How do free withdrawals work with each structure?
Many contracts allow up to 10% annually without surrender charges. Higher interim values under simple interest can translate into larger dollar withdrawals within the free amount. Carrier rules vary.
Does the death benefit differ during the guarantee period?
If the policy pays account value on death during the term, a higher interim value under simple interest may yield a larger payout before maturity. Confirm death-benefit provisions for your contract.
How should I pick a MYGA term length?
Match the term to your timeline for liquidity and rate goals. Start by checking current marketplace leaders for the 3-year MYGA tier, the 5-year annuity tier, and longer terms like the 7-year and 10-year pages to balance yield with flexibility.
What about taxes and penalties?
Withdrawals are taxable as ordinary income to the extent of gain. A 10% IRS penalty may apply to taxable amounts withdrawn before age 59½. Consider your tax situation when planning withdrawals.
About the Author:
Jason Stolz, CLTC, CRPC and Chief Underwriter at Diversified Insurance Brokers, is a senior insurance and retirement professional with more than two decades of real-world experience helping individuals, families, and business owners protect their income, assets, and long-term financial stability. As a long-time partner of the nationally licensed independent agency Diversified Insurance Brokers, Jason provides trusted guidance across multiple specialties—including fixed and indexed annuities, long-term care planning, personal and business disability insurance, life insurance solutions, and short-term health coverage. Diversified Insurance Brokers maintains active contracts with over 100 highly rated insurance carriers, ensuring clients have access to a broad and competitive marketplace.
His practical, education-first approach has earned recognition in publications such as VoyageATL, highlighting his commitment to financial clarity and client-focused planning. Drawing on deep product knowledge and years of hands-on field experience, Jason helps clients evaluate carriers, compare strategies, and build retirement and protection plans that are both secure and cost-efficient.
