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Market Linked CD’s Can Provide Higher Returns

Market linked CD’s are a good alternative to traditional bank CD’s and annuities.  Bank CD’s are currently yielding 1% on a short term basis and no higher than 3% on a 5 to 7 year term.  Market linked CD’s work differently as they have a guaranteed minimum return (usually .5% to 1%) but have an unlimited upside.  Instead of providing a set return over a period of time, market CD’s base returns on the performance of the securities in the market such as indexes or individual stocks.  If the investment yields a positive return in any given year, a portion is shared with the investor.  If the investment has a negative or neutral return, the investor is credited with the minimum state return such as .5% or 1%.  Market linked CD’s are FDIC insured just like a traditional CD. Read more

Risk Free Investments

In this post we explain some things about Risk Free Investments.  There are a number of risk free investments (no risk to principal) available to those looking for safe/conservative ways to earn interest on investments.  While it is smart to be conservative when approaching retirement or in retirement, it can be difficult to keep up with inflation only using strategies without market risk.  Money markets, CD’s and Annuities are three popular choices of focus in this post.

Money Markets

While Money Markets are safe and a convenient place to keep cash, they are simply not going to yield any type of meaningful return.

Certificates of Deposit

While better than a Money Market return, CD’s are still averaging less than 2% on a 5 year commitment nationally.  They are certainly safe but will not be likely to keep pace with inflation.  Market Linked CD’s may be a better choice for someone that is looking for the FDIC backing provided by CD’s.  Market linked CD’s provide principal protection but have a variable return that can range from 0% up to 8% or 9% depending on the terms and bank.

There are a number of different crediting strategies used but one of the more common ones is the “Basket of Stocks” approach.  The bank picks out a group of stocks (usually between 5 and 15).  If the overall portfolio is level or positive for the year, you will pay the stated/declared interest rate.  If there is an 8% interest rate declared, that is the amount you would pay for that year.  They repeat this process for the duration of the commitment.  If an 8% declared rate product is on a 7 year surrender schedule, the client will receive 8% for every year the account is positive.  They will receive 0% for years it is negative.   As a result, Market CD’s can be a good approach for the more conservative investor.

Annuities-

Annuities can be a good approach but you must do a great deal of research before you purchase one. There is a big difference between a SPIA, a Fixed annuity and an Indexed Annuity.   A fixed annuity (Also called a MYGA) can offer slightly higher rates than CD’s with the same term years. As of this post, the best 5 year fixed annuity is at 3.4%.

A SPIA (single premium immediate annuity) 

This product is based on your income and is not appropriate for any type of accumulation. Fixed Indexed Annuities can be a great option for account growth.  Although, they can also be a poor choice  this depends on which company and product you choose.  Fixed Indexed Annuities use market indexes (usually the S & P 500) to determine the amount of interest to credit to accounts.

They have crediting methods that provide a portion of the index growth to the account.  This is where there can be a wild difference in companies.  As an example:  One carrier currently credits the gain in the S & P 500 per year up to  a cap which is currently at 2.75%.  This means the most a client can get in a year is 2.75% return regardless of how high the market goes.  There is another carrier that credits 75% of the gain of the S & P over a 2 year period.  This would have provided over 22% interest  to an account in the 2012 to 2013 time period.   Obviously, it is important to choose the plan with the best crediting methods.  Because if you choose the wrong one it can cost a bundle.

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People shopping for an annuity in Connecticut will not have as many choices as those in other states. In fact, Connecticut is one of the most restrictive annuity states in the country (Not counting NY).   As a result, you will need to look a little harder to find the best offers. Read more

Apollo Global Management is setting the table to make a major move in the indexed and fixed annuity market.  Apollo owns Athene Annuities (an up and coming annuity company), recently purchased Presidential Life and now has purchased Aviva USA.  These moves should allow them expand on the limited number of states they currently offer annuity products in.

It looks like Apollo is setting the state to become more aggressive with product offerings and innovative products in the fixed annuity segment.  While the overall annuity market in the US has slowed down over recent quarters, the fixed indexed and fixed markets continue to grow.  A slew of companies have jumped on the band wagon and now offer fixed, indexed or Deferred Income annuities but they have not been able to meet the innovation or guarantees of the Guggenheim companies products.  (Security Benefit and Equitrust products)

Hopefully, Apollo will be introducing new products in order to provide some solid alternative to Security Benefit and Equitrust.   Time will tell.

Companies have been coming to the market with a new type of insurance plan called “Longevity Insurance”.   The plans are being offered by NY Life, Symetra, The Hartford and Met life.   There will surely be a number more coming out with plans over the next 6 to 12 months.

The idea behind longevity insurance is that a person can put away money for a number of years (most plans are for people in their 50’s) with a guarantee that they can have lifetime income at a future date.  Most of the plans currently available require that you wait at least 10 years to start income.  Some of the plans will allow the income stream to pay out for a single persons lifetime while others offer a joint spouse option at a reduced payout.

This concept is not new and has actually been used by insurance companies for over 100 years.  For the past 10 years, companies have been offering annuities with income riders that allow people to do the same thing.  Put money away for a number of years with a guaranteed lifetime income payout at a future date.   There are some variables to consider when comparing longevity insurance to a regular annuity with an income rider but there are two things that are the most important:  How much will they pay at a future date and do they allow you to keep access to your investment.

Access to investment:   Most income riders will pay out lifetime income without annuitizing the contract.  In other words, they do not take the lump sum away once they start paying income.  On the other hand, most of the Longevity plans annuitize the contract which takes the lump sum from the investor in return for income payments for life.

Payout:  Here is the most important point.  How much will the product payout as lifetime income at any future date.  The Longevity products I reviewed payout out substantially less than the most competitive income riders.  For example:  If a 55 year old male put $100,000 in the Symetra longevity plan at age 55 they could get an income stream of $6,050 a year for life at age 60 or $8,483 a year for life at age 65.  Compare that to the Great American income rider using the same person and same investment amount of $100,000.  They would pay out $7,500 a year at age 60 and $11,000 a year at age 65.  Substantially higher payouts.

At the end of the day, Longevity insurance is just a new way for companies to try to crack into the annuity market.  The product looks and feel like an annuity with an income rider with a low payout.   At this point, there is nothing unique or advantageous about “Longevity Insurance”.