Annuity FYI Visitor Blog

Equity linked CDs can be a safer and lower-cost alternative to equity-indexed annuities for some investors.  In the recent PR Web press release “Equity-Linked Certificates of Deposit: The Safer Low-Cost EIA Alternative,” Jeffrey Voudrie’s article from Guarding Your Wealth is summarized.  Equity linked CDs have the benefits of FDIC insurance protecting your principal along with the ability to participate in market index upswings.  While an equity indexed annuity is advertised to seniors and can be good a product for some investors, they also pay high commissions to advisors and there is a higher chance for abuse of investors.

This author believes that the equity linked CD criteria allows the product to offer the benefits of equity-indexed annuities without the drawbacks.  Banks sell the CDs, whose return is linked to one of the stock market indexes.  They are FDIC insured and while most have a minimum investment of $25,000, you can find $1,000 minimums if you look.  Taking your money out before your term ends is the only way that your principal could be lost.  You would also face a penalty in that instance, so it is best to keep your money in over the term course.  Most investments are short term, around three years.  Equity linked CDs can be a good investment for you, so see what you can find out there.

According to “Market-Linked CDs Represent a Hybrid Between CDs and Stocks,” Richard Barrington of Money Rates says that equity linked CDs are a nice combination of the two investments.  They offer some stability like traditional certificates of deposit along with the chance to participate in the upside of the stock market.  Equity linked CDs are FDIC insured and you are guaranteed a return of your principal investment if you hold the CD to maturity.  You also get a return based on the stock market’s performance over the time you had your CD.

Each CD has its own specific terms and those are important to know in detail before making the investment.  The equity linked CD criteria you should know consists of which specific stock index your CD is linked to and what the participation rate is.  It won’t be 100%, but the higher the rate, the better.  You also want to see if there is any cap on your gains, how your gain is calculated, and how solid your guarantee will be.  Make sure that FDIC insurance covers your total investment so you don’t only rely on the solidity of the bank offering your CD.  The key in selecting an equity linked CD is knowing exactly what your terms are and how the product will work for you.

The United States Securities and Exchange Commission has an informational page dedicated to equity linked CDs.  They are certificates of deposit that tie your rate of return to a stock index’s performance.  With FDIC insurance, equity linked CDs have an extra safeguard that other investment products do not.  The terms vary with different banks, but these CDs usually have a term of around five years.  When you compare equity linked CDs with other products, banks like to highlight the principal protection that they offer.  If there is a downturn in the market, the original principal will not be affected.

There are things to consider when looking into an equity linked CD.  They do not have liquidity before the term expires so they should not be used if you might need your money sooner than the five years or so.  Market risk and call risk are associated with equity linked CDs.  FDIC insurance covers the amount permitted by law, but always read all of the terms associated with the FDIC.  Many returns are calculated by averaging the index’s closing price over a period of time instead of upon the maturity of your CD.  Look into the equity linked CD criteria to find out the participation rate and whether or not there are caps associated with your product.  Since equity linked CDs can have different tax benefits than regular CDs, make sure you know those before purchasing.

Since Annuity FYI has added equity linked CD investments to our recommendations, it is important to explain how the recommendations come about.  Equity linked CDs have a lot of the same benefits as annuities so they can be easily compared.  Those benefits include principal protection, market upside participation, and a low cost.  Annuity FYI believes that an equity linked CD can be an important part of retirement portfolios.  They are preferred over fixed/equity-indexed annuities because of their low cost, short time commitment, and the fact that they are FDIC insured.

The equity linked CD criteria used to evaluate the products and companies selling them is straightforward.  A participation rate with the corresponding index, for example the S&P 500, higher than 90% is preferred.  A low spread of 1% or less also indicates a preferred equity linked CD.  Annuity FYI looks for equity linked CDs without a performance cap rate and with a maturation period of six years or less.  When evaluating the insurance company selling the equity linked CD, their customer service skills, company management, and the ease in which you can access your account are all taken into consideration.  Contact an expert for more information regarding equity linked CDs.