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Ask Safe Money
Sam & Safe Money Sue
Q: We are a retired couple who are trying to have our savings grow
to keep pace with the cost of living. In this current economy, when
interest rates are so pathetically low, my husband thought of investing in
a tax deferred annuity. I am very skeptical as to the safety and wisdom of
this choice. Can you offer any feedback?
| Sam: There seems
to be a million books out there on how to pick the best toaster, car
or mutual fund, but books on annuities are scarce. If they're
written by a mutual fund/ETF advisor the advice is "annuities
are terrible" and if it's by an annuity counselor it's
"annuities are great". We don't offer financial advice
because everyone's situation is different. but we can tell you what
we believe.
Fixed annuities, and this includes fixed rate and index
annuities, have an excellent record of safety (more
on this). Almost every carrier is rated on it's financial
strength by raters
and based on history the odds of losing money because the carrier
tanks is very, very low. Make sure the financial ratings are
acceptable to you.
|
Sue: The biggest
fight between the anti and pro annuity crowds is on surrender, or
early withdrawal charges. We believe the answer is the annuity
should meet your overall liquidity needs after considering the
surrender charges. As an example, you probably wouldn't take all of
your money out of a savings account and put it in a 5-year CD
because you might need some of it in the future. With the same
thinking, you wouldn't put all of your money into an annuity with,
say, a 10 year surrender charge. However, if there is a part of your
money that you probably won't tap for at least ten years, then why
not for that part of your money?
Some annuities guarantee the rate for the entire surrender
period, others may only guarantee the first year and then declare a
new rate every year thereafter. Since there is no way of knowing the
future we strongly suggest you look at the past. Ask the agent to
show you the renewal interest history of the annuity
you are considering because this will at least show you how the
annuity company treated previous customers. We also strongly believe
that if the annuity company will not provide it - or says it's too
new a product - that you run away and find a different company. |
Q: Has the FDIC ever taken over a bank and then returned it?
| Sam: No. |
Sue: Not that
I'm aware of. FDIC pays out after the bank has failed. If no other
bank will take over the failed bank's deposits FDIC will set up a
temporary bank until the failed accounts are disbursed, but it is a
new bank and not the old one. |
Q: Is there a way to eliminate a penalty for withdrawing from an
annuity?
| Sam: Dying
usually works. Most carriers will waive surrender penalties if the
owner dies. Other than that you're probably stuck. |
Sue: Some
carriers will waive charges if you need the money for long term
nursing care. And many will waive charges if you annuitize (receive
regular payments) for at least 5 years. |
Q: In the case of a
fraternal going bust is there a safety mechanism in place similar to the
state guarantee fund that covers fixed annuity carriers?
| Sam: We're
getting more questions about fraternal benefit entities because some
are offering annuities with high rates. No, fraternal benefit
societies do not have a separate guarantee fund type backup. |
Sue: The
financial strength of the specific fraternal you asked about is not
rated by any independent rating agency we can find. You'll need to
determine if it is safe enough for you. |
Q: Is my index annuity covered by my state guaranty fund?
| Sam: Fixed
annuities are covered by state guarantee funds - unless they're from
a fraternal benefit company - and index annuities are fixed
annuities, so yes, your index annuity is covered just like any other
fixed annuity. |
Sue: The
exception would be the handful of index annuities that are
intentionally registered as securities, these may not be covered.
Generally if the annuity is offered by prospectus and does not have a
minimum interest guarantee it is not covered by a guaranty fund.
When in doubt ask the agent, most, if not all states require the
agent to provide notice of the guaranty fund after you've purchased
the annuity, but not before you purchase (don't ask why). However if
you ask about the notice they can provide it. |
Q: Can you tell me how much, per dollar, banks are required to keep
on reserves and how much annuity carriers are required to keep on reserve?
Sam: Simplistically,
an adequately capitalized bank needs reserves of $1.04 for every $1
of deposits and a well capitalized bank needs $1.06 of Tier 1
capital for every $1. By contrast, an annuity carrier needs to
reserve $1 to $1.06 or more for every $1 of annuity cash value. When I last
did the comparison - before the recession - the average bank had
reserves of $1.10 and the average annuity carrier had reserves of
$1.06 for each $1.
One key point - These comparisons are absolutely meaningless. |
Sue: There seems
to be an urban legend among agents that annuities are a part of some
mystical "legal reserve system" that mandates annuity
carriers set aside higher reserves than banks. The truth is legal
reserve is merely an accounting term meaning there is a legal or
statutory minimum that must be set aside, and this applies to both
banks and insurers. The other problem is believing that bank and
insurer reserves can be directly compared.
A dollar sitting in a checking account or CD is a current promise.
The bank must set aside additional money to help ensure you have
access to that dollar today. But the bank makes no future promises.
They won't guarantee to pay you a minimum rate of interest in the
future, or guarantee that can withdraw, say, 6% a year from your
account for as long as you live.
A dollar sitting in an annuity is both a current and future promise.
The insurer must set aside additional money to help ensure you have
access to the dollar today, but
also to cover their future promise of paying at least a minimum yield
and a lifetime income if desired. You
can't compare bank and annuity reserving because the annuity reserve
is based on the value of guarantees of the future while the bank only
deals in the current world. |
Q: A financial planner is telling my 89 year old mother who lives in
Illinois to put $50,000 in a deferred fixed annuity with a fraternal
benefit society. Would this annuity be covered by the Illinois Guaranty
Association? Also, her planner and lawyer is telling her that putting this
money in a 3-year annuity would help her qualify for Medicaid. Does this advice seem sound?
| Sam: Is your
annuity issuer part of the Illinois Guaranty fund? Ill. Rev. Stat.,
ch. 73 1065.80-3 Sec. 531.03. under Coverage and limitations
says “(b) This Article shall not provide coverage for:...(vi) any
fraternal benefit society organized under Article XVII of this Act,
any mutual benefit association organized under Article XVIII of this
Act, and any foreign fraternal benefit society licensed under
Article VI of this Act.” |
Sue: The
only way to know for sure is to contact the annuity insurer or
the guaranty fund (Illinois Life & Health Insurance Guaranty
Association, 8420 W. Bryn Mawr Avenue, Suite 550, Chicago, IL 60631) and ask them to send you a letter saying you are
covered. This outside link http://www.nolhga.com/policyholderinfo/main.cfm/location/ga
provides a site with links to all state guaranty fund web sites.
On the Medicaid planning question, sorry, we don’t offer legal
advice. |
Q: How do I find out if an annuity carrier is part of my state's
guaranty fund?
|
Sam: The state guaranty fund includes annuity carriers
licensed and approved to do business in the state (with the
exception of fraternal issuers that are not generally covered by guarantee
funds). So you need to find out if the carrier is licensed and
approved by your state. Here's a page that provides links
to all state insurance departments. |
Sue: When you
reach the state insurance department website there often is a
section titled "consumers" or "find a licensed
company or producer" or "authorized companies". These
links will often take you to another page where if you type in the
name of the company the page will answer whether they are licensed
in the state. If you can't find the section, call or email the
insurance department and ask them whether the carrier is
licensed. |
Q: If there is a total financial collapse which is safest a
bank, a credit union or a fixed annuity? Which might give me quickest
access to my money?
| Sam: If we have
a complete meltdown the best places might be canned foods, ammo and
Smith & Wesson. If a currency becomes worthless it really
doesn't matter because dollars will only be useful to feed the
campfire, so for your question to work we would need no more than
a partial collapse. |
Sue: The safest
places are FDIC insured bank accounts and NCUSIF insured credit
union accounts, followed by fixed annuities balances up to your
state guarantee fund limit. The quickest access historically has
been almost immediate access to insured bank and credit union
balances, typically followed by annuity balances up to guarantee
fund limits. Uninsured bank/credit union accounts and non-guaranteed
annuity balances may never be paid in full. |
Q: Is it better to have several small annuity policies or one big one?
| Sam: I like
having several small policies split up among different carriers. The
main reason is it gives me more flexibility down the road in that if
a need a chunk of money I can cash in one policy and let the others
continue. And although annuity carrier failures are rare, splitting
up policies and carriers means I don't have all my eggs in one
basket. It also may help keep me under the state guaranty fund
limits if the carrier does die. |
Sue: The main
benefit in having one big annuity policy is that you may earn higher
yields; several carriers pay a higher rate for larger annuity
premiums. Whether or not the coverage by a state guarantee fund
increases if you use multiple annuity carriers depends on the state.
Some states say their maximum coverage limit is per carrier, others
say coverage is per annuityowner, and others, like Maryland, won't
tell you if you're covered until after the failures occur. |
Q: Why isn't Florida listed among the states that will
guarantee your fixed annuity? I just read the Florida law of 1979
that they will guarantee up to $300,000 per person.
| Sam: Every state
guarantees at least $100,000 in fixed annuity cash value. States
providing additional coverage are spelled out
here. |
Sue: This
link shows in Florida $300,000 of life insurance death benefits
or "Annuity in Benefit" are covered or $100,000 in cash
value. |
Q: Do safe money places allow monthly interest payments? My mother
has $25K CDs coming due this month. She is 92 years old and has been
living off monthly interest payments. Now the CD rates are too low to
avoid spending part of the principal.
| Sam: Looking at
bankrate.com today (1/1/10) I see there are 5-year CDs paying up to
3.25% interest, and a few annuity websites show 9 and 10 year
multi-year fixed annuities yielding over 3.6%. I don't know whether
they all make monthly interest available, but some do, and the
interest income at those rates would be $65 to $75 a month. |
Sue: But unless
your mother is saving the principal for another use perhaps she
needs to look at why she is living on interest only. If you found a
place yielding only 2% and your mother withdrew $175 a month the
money would last over 13 years. At $125 a month the $25,000 lasts 20
years. We don't provide financial advice, but we do encourage people
to ask themselves what they really want to accomplish with their money. |
Q: Can you explain how annuities are creditor proof please?
| Sam: In some
states the cash value of an annuity is protected in the event of
bankruptcy from claims of creditors |
Sue: Whether
your annuity is protected depends upon where you live and how policy
ownership is structured. If "creditor proof" is important
to you sit down with an attorney - not just the agent - and get the right
answers. |
Q: Can a US Legacy Treasury Direct account have as a beneficiary someone who
lives abroad and does not have a Social Security number?
| Sam: Yes on the
first and yes on the second. |
Sue: A Treasury
Legacy account does not need the Tax ID number (Social Security or
ITIN for non-citizens) for a named beneficiary when the account is
set up. It also appears either a citizen or non-USA citizen can
receive the proceeds abroad.
For a specific answer to your situation you should call the
Treasury help desk at 800-722-2678,
recorded information is available 24 hours a day and customer service
representatives answer questions from 8 a.m. to 8 p.m. Eastern Time
weekdays. |
Q: At 48 years of age, and with no other investments, should I put my
$100,000 from my 401K and my pension into a Fixed Index Annuity with an 8%
per year guarantee?
| Sam: We do not
give investment advice, sorry, but I did want to address the part of
your question mentioning the 8% per year guarantee. Several index
annuities and few fixed rate annuities offer a feature called a
Guaranteed Lifetime Withdrawal Benefit (GLWB), it is also called a
lifetime benefit and other names. What they all guarantee is
that you may withdraw a guaranteed percentage of the annuity value
each year and the payout will continue until you die - even if the
annuity value goes to zero. Some carriers guarantee that the income
withdrawal payout will increase at a certain percentage each year -
6%, 7%, 8% - until you begin to take withdrawals, even if the actual
growth is less. I think this is a nice feature because you know what
your future payout income would be. However, that 8% income payout growth is
NOT a yield or return. Without the guaranteed payout growth the
annuity might give you lifetime withdrawals of $5,000. With
income payout growth you might receive a payout of $8,000. This is
not a 5% yield or an 8% return because you need to take into account
how much principal is returned. |
Sue: Say your
annuity cash value was $100,000, you earned 4% yearly interest, and you
died in 10 years. If you were taking out $5,000 a year you would
have received a total of $50,000 and your heirs would get the
remaining annuity cash value of $87,994 for a total cash return of
$137,994.
If you were taking out $8,000
a year you would have received a total of $80,000
and your heirs would get the remaining annuity cash value of $51,976
for a total cash return of $131,975.
With the 1st you took out 5% a year and in the second case you took out
8%, but the actual return or yield on both is 4%.
The GLWB is mainly designed to guarantee
income and give annuityowners access to their cash value but it does
not guarantee a yield on your cash value. If provides NO benefit if
you die before your own cash value is exhausted.
When does the GLWB pay off? After you have
spent all of your own money and the insurance company is finally paying out of
their pocket. The GLWB protects you against living too long,
earning bad returns, and thus running out of money.
When would the 8% income growth guarantee
promised at age 48 become a true 8% return? With most annuities you would need to live
past age 102.
|
Q: I recently requested and received the surrender value on a 10
year
matured benefit. Three checks were sent; $3,142.25, $20.89 and $4.00.
This was for one modified premium term life insurance policy from
1999-2009. The first year extra premium was $620.36, the second year thru the
10th was $335.18. An interest rate of 6% for the 1st yr and 3.5%
thereafter was credited.
I also paid $64.00 every month for 10 years for the death benefit
insurance coverage. The amount I received seems small,
can you explain why.
| Sam: A modified premium life
policy includes paying additional premiums that are
returned at the end of a selected period of time, in your case 10
years, and these are increased by interest and often by forfeitures of
folks that cash in early. I think what you are saying is on top of
the $768 regular yearly insurance premium ($64 x 12) you paid an
additional $620.36 the first year and then an additional $335.18 in
premium for
the next nine years .
If you earned 6% the 1st year and 3.5% thereafter on your total
additional premium of $3,636.98 paid in over 10 years you
should have gotten back $4,371.53. Instead you got back $3,167.14,
meaning not only did you not see any interest at the end but it cost
you $469.84.
|
Sue: There are
several ways this might happen. The simplest is you really did start
out with a value of $4,371 but there was a 28% surrender charge
subtracted leaving you with $3,167 - but you said the benefit
matured and at maturity surrender charges are zero.
A more likely possibility is you were charged policy fees. An $8
a month policy fee would drop that additional premium by about $100
a year and the end net result comes very close to the $3,167 you
got. There may also have been a premium load that also reduced the
money you thought you were paying into and earning interest
on.
I'd send a letter to the insurer saying "I should have received $4,372.51, you sent me
$3,167.14, please show explicitly what happened to the missing
money".
|
Q: Can I cash in Savings Bonds where my child...parent...spouse is
listed as owner or co-owner and I am not. Can I cash in a bond where I am
the beneficiary and the owner is still alive?
| Sam: No |
Sue: It's not
quite as cut and dried as Sam says but he's probably right. What the
U.S. Treasury site says about the matter is "If you're not
listed as the owner or co-owner on the bonds you're redeeming,
you'll have to establish that you're entitled to redeem the
bonds." Talk to your local bank if you have questions. |
Q: I'm concerned about putting 500k in an annuity guaranteed at
3.70% for three years with an insurance company. Would my
money be safer in Treasury Bills for the next three years when I retire?
| Sam: Yes. |
Sue: A direct
Treasury obligation - Treasury bonds, notes, bills - is backed by
the full faith and credit of the U.S. Altho you may get more or less
than the stated face value if you sell these before they mature, you
will get back the face value at maturity. There is nothing safer
from a credit standpoint.
Having said that, as I write this the yield on a 3-year T-bill is
around 1.3%. It sounds like you could earn 2.4% more over the next
three years with the annuity, or in dollars the annuity would yield
over $37k more interest over the next three years than the T-bill.
So the question is how safe is the annuity?
Talking about fixed annuities & carriers in general, the
fixed annuity value is backed by the insurance company. There are
several companies that rate the strength of annuity carriers
and top rated carriers have an excellent record of safety.
You need to look at the financials and ratings of the annuity
carrier and determine if you are comfortable. Since we don't give
financial advice only you can make the final decision. |
Q: We're thinking of using some of our retirement money to buy an income annuity,
so that at least we know we will always have enough coming in each month
to cover the basics. How can we get an idea of how much income we can get?
| Sam: Income
annuities, also called immediate annuities, are what many people think
of when they hear the word annuity. An immediate annuity can provide a
monthly income for a specified period of time, for a lifetime, or for
two lifetimes.
|
Sue: A
site that will give you an idea of the income you can receive based
on the annuity design you select is www.immediateannuities.com
And if you see one that fits they can even act as your agent.
|
Q: What would happen if the bank that is managing my CDARS account
goes under (this explain what CDARS is)?
In other words, is there any scenario that a participant in a bank's CDARS
program could be out of their investment?
| Sam: We
asked CDARS your questions and they said: "The
failure of the Relationship bank would not affect the status of the
CDs that have been issued by other banks through CDARS. In
past failures of Promontory [CDARS] member banks, the custodial
accounts of the failed bank have been transferred to healthy banks
and there has been no disruption in servicing of outstanding CDs." |
Sue: So the
answer to your question is your CDARS CD is as safe as the FDIC
insurance backing it, and is covered for up to $50 million.
I like CDARS. If you have questions or want to find a CDARS bank
their web site will
help. |
Q: Why use a firm to locate banks that supposedly provide the best
CD yields nationwide? Doesn't the
middleman add a fee for this service
| Sam: The CD
searchers I've seen collect a fee from the bank for getting a new
depositor, but so what. The reason to use a middleman is to find a
higher yield than you can find yourself. If the middleman can get
you an extra quarter or half percent than you can get yourself does
it really matter if there is a little commission or legal baksheesh
being paid? |
Sue: If you
don't want to use a middleman there are sites like bankrate.com that
list rates and contact information for dozens of banks. |
Q: Can I move my 5 year CD money to an annuity even though it has
only been in the CD 4 years?
| Sam: You almost
certainly can, but should you? Many CDs charge a surrender penalty
equal to one year's interest, so if you cash in the CD you
lose. |
Sue: But you
also might win, it depends on the cost of the liquidity. Say the CD
was paying 2% a year and penalty for cashing out the CD is also 2%.
If you cash it out today you lose the 2% interest you would have
earned plus the cost of the 2% surrender penalty for a total of 4%.
But what if the annuity paid a 5% rate? Then, even after penalties
and forgone interest the annuity leaves you 1% more in your pocket.
We talk about the concept of liquidity costs here. |
Q: If I cash in a CD at maturity, I know I have to pay tax on
the interest I earned. But if I keep renewing the CD every year,
and never take any money out, do I still have to claim the interest earned
each year? Isn't that double taxation since I'll have to pay the tax on the interest when I actually take it?
| Sam: Interest
earned on a certificate of deposit is taxable in the year it is
earned - not withdrawn, the CD owner receives a Form 1099 saying how much
annual interest
to report as income. But the taxes on this interest is only paid
once. |
Sue: The
exception would be if the CD was in a qualified account, as in an
IRA. See your tax advisor if you have questions about your personal
situation. |
Q: Are Series EE savings bonds covered by FDIC?
| Sam: No. |
Sue: Only bank
accounts are covered by FDIC insurance. But don't worry, all Savings
Bonds and I Bonds are backed by the full faith and credit of the United States
Treasury. |
Q: I live in South Carolina. If my
state only insures annuity policies up to $100,000, but I have $145,000 to
invest, would I be covered if I bought two of the same policy. It is
a index deferred annuity with [a carrier].
| Sam: Let's split your
question into two parts. If the state guaranty fund covers $100,000
of annuity cash value per carrier, and you put $145,000 into 1, 2 or
10 policies with the same company you are still only covered for up
to $100,000 in total. The coverage limit normally is for each carrier, never
each policy. |
Sue: But you
live in South Carolina where up to $300,000 of annuity values are
covered according to http://www.sclifega.org/faq.php
. So even if the $145,000 was in a single policy it would fall
within the guaranty limits.
|
Q: Where can I find an insurance company's rating?
| Sam: This site
provides links to the rating services here |
Sue: A.M.
Best is the best known insurer rater and will provide their
current rating if you type in the carrier name. The site does
require you to register, but it's free. |
Q: I see that fixed annuities are covered
up to $100,000 per account holder by state Guaranty Associations.
However, what if I have annuitized - does that change the coverage?
And what about my Variable Annuity with a Guaranteed Lifetime Withdrawal
Benefit (GLWB), would I lose that if the company became insolvent? I am in
Washington state.
| Sam: Excellent
questions, and I can't give you firm answers on any of them because
there are often differences between Guaranty Funds and cloudy
language on specific specifics. |
Sue: Washington
says that up to $500,000 of the present value of individual
annuities is covered by the fund. http://www.walifega.org/additionalinfo.cfm
Would GLWB guarantees be included? I don't know. |
Q: I am attempting to investigate a company offering an index annuity. I have asked for a historical graph
tracking the rate of return for each of their three crediting methods on an annuity they want my mother to move to. The salesman hedged when asked
and latter supplied 5 pages of hypothetical returns for three indices.
Am I off based in requesting this type of information?
| Sam: You have
every right to ask for printed data from the insurance company
showing actual interest earned on existing index annuity
policies. Hypothetical illustrations are useful exercises but they
are not the real world and are often slanted to present a certain
point of view. |
Sue: My personal
feeling is if a carrier cannot or will not provide actual interest
earned numbers I
would not buy the annuity.
|
Q: I have a CD that matured and I am looking for different
institutions to reinvest my CD money. I have seen an ad for a company that says they research CD
rates and will put the money in a higher yielding FDIC insured CD. Is this a safe way to
go?
| Sam: These are
probably “brokered” CDs. These CDs may pay higher interest than
the local bank and they are covered by FDIC insurance limits, but
with some if you surrender before maturity you may get the “market
value” of the CD, which could be more or less than you initially
paid. In addition, some CDs are "callable" – meaning the
bank can stop paying interest and send you back your money at their
discretion – and this usually happens when current rates have
dropped lower than what your callable CD is paying. Depending upon
how they are offered a "brokered" CD could be viewed as a
security and is not discussed on this site. |
Sue: If it is a
“brokered” CD you also need to know the bank behind it. The
reason is if you are already maxed out on FDIC coverage at one bank,
and the same bank issues the brokered CD, you might find part of
your money would not be FDIC insured. And as long as we are talking
about “brokered”, since CD brokers may not have a license or be
state registered, check them out very carefully.
The SEC has CD tips
available on their web site at http://www.sec.gov/investor/pubs/certific.htm |
Q: I'm afraid of losing my money.
Sam: That sums
up most of the questions we have been receiving.
Should you be afraid if you have deposits in
a bank or credit union? Especially not if they are covered by FDIC
insurance or NCUSIF coverage, which now protects up to $250,000 of
deposits per owner.
Should you be afraid if you own fixed
annuities? Based on history the answer is no. All fixed
annuities are protected by State Guaranty Funds for up to at least
$100,000, and altho the annuity Guaranty Fund mechanism is a bit clunkier and
moves slower than the bank FDIC one everyone covered by a Guaranty
Fund has always been made whole in the past, at least up to the
guarantee limits. |
Sue: Let's talk
a little more about fixed annuity safety. Fixed annuities are
regulated by 50 state insurance departments that individually check
out and monitor the financial solvency of the carrier. Their job is
to make sure the insurer does not buy too many stocks, mortgages or
junk bonds. The annuity carriers are actively regulated,
something that cannot always be said for investment world
regulation. Yes,
an annuity carrier can fail, but they have an excellent track record
of protecting annuityowners.
That leaves things that feel a little like deposits but are not.
Money market funds are very low risk investments, that are neither
federally insured nor state guaranteed, but they have an excellent record
of safety*. On the other side commercial paper, deposit or demand
notes, receivable certificates and similar things are investments
that are as safe as the issuer backing them, and you need to check
out their financial ratings and strength to see whether you consider
it to be okay for you. *An
update. The U.S. Treasury announced a voluntary program that
essentially guarantees an investor's money market mutual fund
balance as it was on 19 September 2008. Main points: The mutual fund
must sign up for the protection - the investor cannot individually
sign up. The protected amount is the balance on that data, money
added to the fund after that date is not covered. The protection is
expired in September 2009. |
Q: Should I put my $450k into an annuity? I'm getting some money,
what should I do with it? Our mutual funds and other investments have
dropped 20%, please advise.
| Sam: I can't
answer "should I" or "which" questions. To a
large extent the correct answer depends on a person's goals, risk
tolerance, personality and total assets. This is why you need to sit
down with someone you trust - or preferably 2 or 3 different people
- and ask for their suggestions and reasons why. And second, we
don't give investment advice. |
Sue: I can offer
two generalities that usually hold true:
Diversify: Don't put all your money into one place or one
type of place.
It's A Circle: Times are bad now, they could definitely get
worse, but if you believe the long-term outlook for the economy is
positive then you should not react to short-term spookiness,
provided you have the wherewithal to ride out the bad
times. |
Q: Is my money market FDIC insured?
| Sam: We are
getting quite a few questions along these lines about individual
money market issuers. In general, money market accounts are
issued by banks and are covered by FDIC insurance limits, money
market funds or notes are securities and are not
covered by FDIC insurance. The same holds true for mutual
funds, annuities, and U.S government bonds - these are not FDIC
insured because they are not issued by commercial banks. |
Sue: This link
to the FDIC http://www2.fdic.gov/idasp/main_bankfind.asp
allows you to type in the name of the issuer and you will get a list
of FDIC insured banks meeting your description. Try to be specific
(for example if you are looking for Cat Bank your answer list will
contain every bank with 'cat' in its name). |
Q: Can I cash in a savings bond where my Dad's the owner and I'm the
beneficiary, but Dad's still alive?
Q: I heard FDIC can take 90 years to return your money...If I am
over FDIC limits is there one place 100% safe?
| Sam: First, everybody needs
to take a deep breath. It is a lousy financial market, within the
last year 7 banks have failed - more than failed in the preceding 3
years, IndyMac will cost the FDIC fund $4 to $8 billion dollars, and
I believe more banks will fail. But there are 8534 banks that have
not failed, after IndyMac there should still be over $45 billion in
the fund, and FDIC has the right to borrow unlimited funds from the
U.S. Treasury. Although there is no time limit on how long it can
take FDIC to reimburse insured depositors of a failed bank, the
insured deposits are typically available the next business day at a
new bank FDIC has arranged to handle the accounts and even the dead
bank’s ATM cards will still work the next day at the new bank. |
Sue: If you are over
FDIC limits you are treated as a creditor of the bank. In the last
decade uninsured depositors have received back 50% to 100% of the
uninsured deposits - but they always got 100% of insured deposits. One
way to be safe is to ensure all of your bank deposits are fully FDIC
insured, even if it takes accounts at multiple banks.
Another alternative is to use a single bank that offers CDARS. CDARS
can essentially provide up to $50 million of FDIC insurance on ONE
account. For more information check out the CDARS web site at http://www.cdars.com/index.php |
Q: How safe is my bank, what is it rated, and are all my CDs covered
by
FDIC?
| Sam: We are getting some
questions about bank safety. The last question should really be
asked at your bank. FDIC covers bank deposits up to $250,000 for one
owner at one bank, but husband, wife, and joint account would be
covered for $250,000 for each name or $750,000. You should talk to
your bank folks about how to maximize FDIC coverage.
Altho FDIC does not rate the financial strength of banks there
are rating agencies that do. A link to these rating agencies web
site is in the How Safe Are They section. This
agency provides ratings on individual banks if you fill in the
name and state. |
Sue: There have
been some bank failures in 2008 and there well may be more - the
mortgage debacle was painful. It is important to know your bank is
financially strong.
It is also important to remember that in the 70 plus years that
it has been around that no FDIC insured account owner has lost a
dime because the bank failed. The banking system is still safe. |
Q: Where can I get a good safe rate?
| Sam: The problem
is interest rates are down and pockets are getting pinched. You
could always try risk money places to get a higher yield, but higher
returns often mean greater risk of loss. And altho interest rates
have trended down over the last 20 years, if the cycle repeats rates
could start going back at some point in the future so one may want
to preserve some flexibility.
Building Yield Ladders using
certificates of deposit takes the guesswork out of predicting rates.
If inflation becomes a problem I Bonds might
be considered because the yield is directly linked to changes in the
Consumer Price Index, but if inflation retreats I Bonds yields would
also go down. Series EE Savings Bond lock in a low 1.3% interest
rate for 20 years and can be beaten by almost anyone. Or you could
find a bank money market account and try to ride out the
storm. |
Sue: There are multiyear
fixed annuities that will lock in an interest rate for 2 to 10
years and many of these are competitive with bank rates - the
penalty periods tend to match the length of the guarantee. There are
also fixed index annuities that provide the potential for
significantly higher yields than current bank rates - if the index
cooperates - but if the index goes down you could earn zero for the
period. You need to be sure the liquidity provisions of the annuity
meet your liquidity needs.
The real answer is you may not be able to get what you might
consider a "good" safe rate today because rates are lower.
However, this is probably a good time to evaluate what you want your
safe money to do for you and then find the combination of places
that best meets your needs..
|
Q: If I have 5 $100,000 deferred annuities with 5 different insurers,
do I really have an aggregate of $500,000 insurance through my Maryland
Guarantee Association?
| Sam: We were
hoping to get a definitive answer from the Maryland Guaranty Fund
Association http://www.mdlifega.org/
but I'm afraid they were not very responsive. Their website says
annuity coverage is limited to $100,000 per insured if an
insurer goes bust, but it does not address your question (have you
considered moving?) |
Sue:
From reading Maryland Code Sections §9–403
to 405 it appears that the annuity guaranteed cash value is
covered up to $100,000 for each failed company. So, if an insured
had 20 $100,000 fixed annuities at 20 different companies the
Maryland Guaranty Fund could be on the hook for $2 million.
However, after several go arounds with the Maryland Guaranty Fund
folks trying to get a specific response to your question I am left
with this quote from them "If, as indicated, the regulations
and the law is unclear or silent, a decision would be made, at the
time, based on the best available information.". So the
answer is - nobody knows.. |
Q: I have a 5-year CD valued at 1,000,000
with an Annual Percentage Yield of 4.3% over 5 years. I have had it for 2.5 years and would like to withdraw all the money,
would I be penalized for this withdrawal?
| Sam: Probably, but only the
bank knows how much. Altho the typical penalty for getting out of a
CD early is the loss of 6 months interest - which could be 2.15% or
$21,500 in your instance - the penalty may be as low as 7 days
interest or as a long as a year's worth. The bank can tell you what the exact
penalty is. |
Sue: Unless you
have a "brokered CD". These are often purchased thru
stockbrokers and often cannot be cashed in early but must be sold,
in which case you would receive the market value. |
Q: What penalties will I incur if I withdraw
$10,000 from my annuity?
| Sam: Your
annuity contract will tell you. If you are past the early withdrawal
penalty period no withdrawals would be subject to charges (this does
not include two-tier annuities which can have withdrawal conditions
for the life of the contract). Most annuities permit you to take out
10% per year of the total value without charges, so if the annuity
value was over $100,000 the $10,000 withdrawal would be
penalty-free. Some annuities allow unused annual penalty
free-withdrawal periods to add up (if you don't withdraw 10% this
year you may withdraw 20% next year). |
Sue: Your
annuity agreement will tell you how much you may withdraw and what
any penalties may be. You could also call the insurance company and
ask them. You should be aware we are only talking about insurance
carrier penalties, tax considerations are another matter and you
should talk to your tax advisor about your personal situation. |
Q: Would I get a higher return if I took out
the balance of a fixed annuity as a lump sum or annuitized it and received
monthly payments over a period of years?
| Sam: Assuming you do not have
a need for the entire balance today it would depend on which was
higher - the yield you would earn on the annuitized payments or
what you could earn on the lump sum. Another factor is taxes.
Interest earned in an annuity is taxed when received. In a lump sum
all the interest would be taxable at once, but if it is annuitized
the taxable interest is spread over the periods. If the annuity is
properly exchanged for a new one and no money is withdrawn, taxes
are not due at that time. |
Sue: Often the
effective interest rate today on period certain payouts - which is
what you are taking about - ranges from 2% to 4%. To determine the
yield you would earn you need to know the monthly payment (PMT), the
principal amount (PV), and the number of months (n). And then use a
financial calculator to find the interest (i). |
Q: If a certificate of deposit is listed with both mother and daughter
on it how is it treated if one passes away?
| Sam: Wikipedia
says a joint tenancy with right of survivorship or JTWROS is
where the joint owners have a right of survivorship, meaning
that if one owner dies, that owner's interest in the property will
automatically pass to the remaining owner or owners. http://en.wikipedia.org/wiki/Joint_tenancy |
Sue: The bank
can set up ownership of the account to meet your wishes. And since
we do not give legal advice your attorney can provide the right
answers. |
Q: What is a surrender period?
| Sam: A surrender period is a
deferred annuity term for the time in which a penalty is imposed if
you withdraw your money. A very few annuities have no surrender
period - you may withdraw all of your money at anytime without
charge. A very few annuities have a surrender penalty that lasts
forever - the only way to avoid penalties to is to take the value
out over time (annuitize the annuity). The vast majority of
annuities have a surrender period lasting 5 to 10 years. |
Sue: The vast majority of deferred
annuities permit you to take out 10% of the value each year without
penalty (altho the IRS gets involved with the interest received).
Other safe money places with surrender periods are Savings Bonds - 5
years, and certificates of deposit - where it is known as a penalty for early
withdrawal). |
Q: If I have an
FDIC insured account and the bank goes bust when can I expect to receive
my money?
| Sam: In every situation I
looked at your
money was immediately available in the new bank that the FDIC had
persuaded to take over the accounts of the failed bank. |
Sue: This was only true if your account was
fully covered by FDIC. If your account was over FDIC limits the
excess money is treated as if it were a debt to the bank, and you
will receive money as bank assets are sold. This process can take
years and often results in getting back less than 100 cents on the
dollar (but only on the uninsured deposits). |
Q: I have $220,000 to put into an index
annuity, would this yield $1,200 a month?
| Sam: Receiving $1,200 and leaving
the $220,000 intact would require an annual yield of 6.55%. If you
earned 6% the money would last for 43 years, if you earned 5% the
money would last 30 years, and if you earned 4% the money would last
25 years.
Could an index annuity earn 4%, 5%, or even 6.55% over time? For
that matter, could any financial instrument earn these rates over an
unpredictable future? Maybe, maybe not. |
Sue: Because of this uncertainty
more and more index annuities are offering something called
Guaranteed Lifetime Withdrawal Benefits or GLWBs. What a GLWB does
is the insurance carrier guarantees that you will receive at least a
specific percentage payout for as long as you live even if the money runs,
but unlike annuitization, it still gives you access to your money.
For example, an index annuity with a GLWB might guarantee a
withdrawal rate of 6% a year. Say the index annuity did poorly and
your account ran out of money - the annuity company would continue
to pay 6% a year until death. Say the index annuity did well and
earned over 6% a year - either you or your heirs would
benefit.
GLWBs are the story in the current
newsletter. |
Q: Is an IRA multi-account rule better than
a trust? What do you think is the true rate of US inflation? I am 58, does
using some IRA money to buy an immediate annuity make sense?
| Sam: We get a
lot of questions like the ones above, but we don't feel comfortable
answering them. The first question is asking legal advice, and we're
not lawyers. I'm not sure if the second question is asking what is
the inflation rate - which is available at http://www.bls.gov/cpi
- or a philosophical question on inflation, but we don't do
philosophy. We consider that the third question is asking for
investment advice, and we don't give that out either. |
Sue: We try to
answer "how", "what" and "why"
questions, as in "how does it work, what does it do and why
might someone do it".
The reason why someone might purchase a fixed immediate annuity
for life is to establish a regular income that will not run out due
to market losses or how long you live. This income could be a
baseline to help ensure that basic needs are always covered. The
major negatives in selecting an income annuity are usually that the
income stays the same and does not increase with inflation and that
when you die the income stops and the money is gone. However, there
are types of immediate annuities that can increase future income and
ensure that you get back at least what you put in.
Do they make sense for your particular situation? We don't
know, which is why you need to talk with someone that can look at
your whole picture. |
Q: Does the company holding my annuity keep any that is left in it upon my death?
| Sam: In a deferred annuity,
no. The insurance company pays the annuity balance to the named
beneficiary. If the annuity is an immediate annuity (also
known as an income annuity) where a person has annuitized and is
receiving regular payments the payments usually stop upon death; the
two exceptions are a period certain annuity that will
continue to make payments until the period is over, and an
installment refund immediate annuity that promises that if the
payments already made do not equal the original premium the insurer
will cut a check for the balance and effectively ensure that 100% of
the premium is paid out. |
Sue: I'll repeat
that. In a regular deferred annuity the annuity balance is
paid out in full to the beneficiary. The only exceptions are
the handful - and I mean a very few - annuity companies that will
charge a surrender charge upon a death.
The California Insurance Department released an annuity
report that says "in a
fixed annuity the amount remaining in the annuity at the annuitant
’s death stays with the insurance company." This
is WRONG - it would only be true if you chose the most
restrictive annuitization payout option. The
insurance company DOES NOT KEEP YOUR MONEY IF YOU DIE
when you own a deferred fixed annuity. We hope California fixes this
incredible misstatement soon.
|
Q: Is it true that a "fixed index annuity" is protected and guaranteed through a state guaranty association?
Q: How may a death in a family affect FDIC insurance
coverage of bank accounts for which the deceased was a co-owner or
beneficiary?
| Sam: The FDIC Guide Your
Insured Deposits says FDIC insures a deceased person’s
accounts as if they were still alive for another six months. So, a
regular joint account that was insured for $500,000 would drop to
$250,000 in insurance six months after the death of one of the joint
owners. |
Sue: There is no
grace period if a beneficiary (or all beneficiaries) of a POD
account or most revocable trusts passes away. If you have specific
questions, you should talk with the people at your local bank. |
Q: I have $300,000 in a qualified IRA, 2 years remaining before no
penalty. With $12,000 penalty if withdrawn now, and a 10% bonus on remaining
$'s, is it advantageous to choose a fixed index annuity that requires 17 yr
commitment. I'm 68.
| Sam: The real
question is, in connection with your other resources do you feel you
would have enough liquidity to meet your needs? Although most
annuities allow penalty-free withdrawals of 10% of the value each
year and many waive liquidity penalties upon a death or if long-term
nursing care is required, only you can decide the degree of
liquidity that is needed. |
Sue: One should
remember that an upfront bonus is essentially prepaid interest and
is not "extra" money. If you have two identical annuities
and one offers a 10% upfront bonus and the other doesn't, the
non-bonus annuity should pay higher interest in future years than
the bonus annuity until the money from the bonus is recaptured. |
Q: If I were to put $80,000 into a short term, three month CD, how much
interest would I earn on that? Assuming the APR was 5.25%.
| Sam: You'd earn
$2,073.26 in interest (if the interest is compounded
quarterly). |
Sue: An "APR" rate is the same as a
compounded rate. A nominal rate is the simple interest or
not-compounded rate. A nominal rate of 5.15% becomes an APR rate of
5.25% if it's compounded quarterly. To calculate this you divide the nominal rate by 4 (since we're
using quarterly compounding) so 5.15%/4 = 1.2875%. In 3 months you'd
earn 1.2875% interest you'd earn 2.5916% (1.012875 x 1.012875) and
in a year you'd earn 5.25% in interest (1.012875 x 1.012875 x
1.012875 x 1.012875) |
Q: It is my understanding fixed annuities
are not covered by the SEC, does any agency have oversight over the
insurance companies?
| Sam: The insurance departments of
50 states, 3 territories, 1 commonwealth and 1 district regulate the
insurance companies selling annuities in their neck of the woods.
They look at the policies, the customer materials, the financials of
the company and decide whether they will permit the company to do business
with their citizens. |
Sue: In addition to reviewing
forms and product filings, insurance departments regularly visit insurance
companies and spend days looking over what the
insurers do and how they treat consumers. If you'd like to learn
more the web site www.naic.org
provides information on insurance regulation. |
Q: Is a deferred annuity practical for applicants
over 65 years of age?
| Sam: Of course! |
Sue: A good question is what are your goals? A
fixed deferred annuity allows interest to grow on a tax-advantaged
basis. Unlike bank interest, the interest compounding in the annuity
is not subject to current income taxes and will not contribute to
Social Security Benefit taxation. Although income taxes will
ultimately be paid when the annuity interest is withdrawn, any taxes not
paid on your Social Security benefits may never be repaid.
Annuities have withdrawal penalties that vary in length and
severity, although most annuities let you access at least the annual
interest penalty-free. This means you should make sure your
liquidity needs match the liquidity offered by the annuity.
Annuities are a safe money place paying competitive interest
rates, guaranteeing a minimum return, and offer a wide range of
liquidity choices. Why wouldn't one be practical for those age
65?
|
Q: Are index annuities safe - what should we look for in a good
company - are local investing groups usually okay to use?
| Sam: I consider index annuities to be a safe money
place because both principal and earned interest are protected from
market risk, and to date no one has lost a dime because an index
annuity carrier went bust.
I would look for a company that was financially strong and there
are a list of companies that rate insurers linked
here. |
Sue: I would also ask the insurer for a record of how
previous index annuity owners have been treated - what interest have
owners actually earned since they've owned the annuity.
Good financial counselors may be found everywhere. Ask friends
for referrals (and ask the counselor for the names of a few clients
you can talk with). |
Q: The website called "CD InterestRate Scorecard" shows banks CD's with
interest rates at above 5%. Are these CD's safe
and if yes, for what period of years would it be "good" to purchase these CD's?
| Sam: If by safe
you mean are they FDIC insured you can go to http://www2.fdic.gov/idasp/main_bankfind.asp
type in the information about a bank, and FDIC will tell you whether
it is insured.
If you're asking whether uninsured deposits should be safe
you'd need to check out the bank ratings
section and get the independent ratings on the
banks. |
Sue: Selecting a
"good" CD term means gazing into the future. If rates will
continue to rise in coming years short-term
maturities let you roll the CDs into higher yielding ones, but if
today's rates are the high point in this cycle then it might make
sense to lock in rates for as long as one can.
Unfortunately, I'm not very good at predicting the future so I
suggest a concept we write about called yield
ladders. This technique means you don't have to guess which
direction rates will move. |
Q: Two of the EE bonds purchased were stolen. How do I file a claim for this loss.
| Sam: Bonds that are lost, stolen, mutilated, or destroyed can be replaced free of charge as long as
the Bureau of the Public Debt can establish that the bonds haven't been cashed.
To assure that the bonds can be traced, owners should keep records of bond serial numbers, issue dates, registration, and social security or taxpayer identification numbers in a safe place separate from the bonds.
|
Sue: To get your bond replaced, complete
Form 1048. On this form, provide the approximate issue date along with the complete names, addresses, social security number that appeared on the bond, and the bond serial number. If you don't know the serial number or denomination, just write "unknown" in the space provided. If the bond owner is a minor, the form should be signed by both parents and the minor's age and social security number should be included. Mail the completed form to: Bureau of the Public Debt, Parkersburg, WV 26106-7012. Replacement bonds will still show the original issue date |
Q: I'm 57 years old and already retired. I
have $500,000 cash. How can I generate $4000/month from this money?.
| Sam: If you put
$500,000 in a shoe box and withdraw $4,000 a month the money runs
out when you're 67 and a half. Alternatively, if you could net 9.6% a year you could receive $4,000 a month
forever and pass on the $500,000 to your heirs. If you can't average a 9.6% or
higher return you're going to need to make some choices with the
understanding that higher potential returns typically mean greater
risk of loss. |
Sue: If you earn
5% your $4000 monthly income lasts until you are age 73, 6% will get
you to age 74, and 7% will get you to age 77 - all of which may
present a problem because the current life expectancy for an age 57
male is 81 and 83 for a female. The most honest answer is if you
take out $4000 a month you could easily run out of money before you
die.
You either need more money or a smaller income. What's the best
blend of investments to accomplish this? Sorry, we don't offer
investment advice. |
Q: If I have more than $250,000 in a
passbook saving account am I only insured to $250,000 limit? How
about if it is a joint account? $250,000 per person for a total of
$500,000?
| Sam: Yup |
Sue: FDIC covers up to
$250,000 in deposits for one
owner at one insured bank, but there are different categories of owners
that may allow one to increase coverage.
A more complete answer is available here |
Q: Are CD's paying interest based on a
market index a better choice than an indexed annuity from a strong
insurance company?
| Sam: Both
index-linked certificates of deposit and fixed annuities offer the
potential for more interest than you might earn in a fixed rate CD
or annuity. It really comes down to which place gives you the better
upside potential - which gives you better index participation.
Both the CD and fixed annuity are safe money places with the edge
going to the CD because of FDIC. However, in every index CD
I've seen the index floats until the end of the term - if you have a
5 year CD the index level is not locked in until the end of the 4th
year. Many index annuities reset and calculate interest earned
annually. |
Sue: I agree with Sam, and I
have couple of other points to think about. Interest growth within
the annuity is not taxed as current income. Interest growth in the
CD - unless the money is in a qualified account like an IRA - is
taxed. In addition, there are index annuities that guarantee to pay
more than the original principal at the end of the term even if the
index declines.
Although FDIC is very safe it is good to know that no one owning
an index annuity has ever lost money because the insurance company
failed. |
Q: How much does an index annuity pay?
| Sam: Whatever it
is, it could always be a little more, couldn't it. I've seen index
annuity returns back in the '90s over 40%! And there were some that credited
double digit interest rates last year.
|
Sue: Although index annuities
have once in a while produced a very high rate of interest for one
year, you need to remember that if the index goes down you may not
earn any interest for the next year. Index annuities have averaged
returns that are competitive with CD rates over the longer term, but this is not a
guarantee they will do so in the future. They will not produce
double digit interest rates every year, but if they earn 2%
more than another safe money place the index annuity will be worth
much more over time. |
Q: Does it make sense to put a fixed annuity
in a qualified retirement plan?
|
Sam: Absolutely not. When you buy a
fixed annuity you are paying for a tax deferral benefit and when you
put a tax deferred annuity inside a tax deferred retirement plan you
don't get double tax deferral you get one wasted tax deferral.
Why pay for something you don't need? |
Sue: You don't pay extra for the tax deferral.
Interest earned on fixed annuities grows tax-deferred because they
fall under the same tax-deferred umbrella of all long term savings
plans (which is why an IRA is also known as a Individual Retirement
Annuity).
I've found the main reason people
buy an annuity is for the potentially higher yield. If your IRA
choice was an annuity yielding 6% or a similar non-tax-deferred
vehicle yielding 4%, which one would you pick? |
|
Safe Money Places®
