Annuity FYI Blog

Equity linked CDs are lower risk than many other investments, yet they still expose you to possible gains in the market.  They can also be called equity index CDs, or certificates of deposit, and they have been around for about 30 years.  Investopedia’s Brigitte Yuille summarized the investment in “Long-Term Investing With Equity Index CDs.”  As banks deregulated and more competitors came into to the equity linked CDs marketplace, the products became more popular.  Their first introduction was after the stock market crashed and our recent economic downturn has led to a surge in popularity.  Since the government backs equity linked CDs with their FDIC insurance, investors like this low risk product.

With traditional CDs, investors earn a fixed rate between 2% and 4% typically.  Equity linked CDs are linked to an index market such as the Dow Jones Industrial Average.  You have the potential for higher gains when you compare equity linked CDs to traditional CDs.  Either the averaging or point-to-point method is usually used when banks determine the return for the maturity date.  There are caps on some of these investments so if your rate had a 10% cap, even if the return was 14% you would just receive 10%.  Other variables affecting your return include the participation rate, maturity time, movement in the index, minimum deposits, and guaranteed coupon rate.

Equity linked CDs are fairly new to the marketplace and very popular right now.  While the investments might not be for everyone, risk averse investors like these CDs because they allow for the possibility of market growth without the worry of losing your principal in a falling market.  Go Banking Rates offers some equity linked CD information in “A Guide to Market-Linked CDs.”  Equity linked CDs are also known as market linked CDs, market indexed CDs, and index CDs.  They are considered structured investments since they are meant to meet specific investor goals.  By offering the potential for long-term growth and the security of traditional CDs, equity linked CDs can be a great investment for many people.

Investors purchase equity linked CDs to diversify their portfolios without taking on a lot of risk.  If the market increases, your return increases based on the particular index linked to your investment.  Compare equity linked CDs and you’ll find out that some guarantee a base return regardless of what the markets do.  With all equity linked CDs though, you will not earn a return if the market performs poorly.  The most common ways to calculate the return on equity linked CDs are point-to-point and average.  Point-to-point, the simplest method, takes the value of the index at purchase time and the value at maturity and uses that percentage to determine your return.  With the average method, many different observation points are used to find an average return over your investment period.  There are pros and cons for each investor to research when looking into equity linked CDs.

While they aren’t the first company to outfit their employees with a high-tech innovation, John Hancock Financial Services, Inc. has just issued iPads to its wholesalers.  This information comes from “Hancock Follows Dreyfus Into the Apple Store” by Hung Tran of The Mutual Fund Wire.  John Hancock’s U.S. wealth management division has given the iPad to more than 200 wholesalers because of the product’s versatility.  They plan to use the iPad for annuity products, mutual funds, retirement plans and all other branches of their wealth management division.

A few months ago the Dreyfus Corp. gave all members of their sales staff that face clients iPad’s as well.  Most likely many other companies will follow in the footsteps of these innovators whether selling equity linked CDs or other financial products.  The iPad can eliminate mounds of paperwork by holding all of the information within.  In the case of John Hancock, their mutual fund wholesalers used something called the “Playbook,” which was a three-ring binder filled with hundreds of pages of information.  This included facts about products, fund information and presentations.  Not only will using the iPad streamline client information, it will make it much easier for companies to update and make changes.

According to “Annuity Sales Languish at Banks” in Bank Investment Consultant, annuity sales in banks were less than people had hoped.  Author Howard J. Stock points out that variable annuity sales were higher than fixed annuity sales in October for the second consecutive month.  With $1.4 billion of variable annuities sold through banks in October, they actually sold the same amount as in September.  Fixed annuity sales had a small decline from $1.2 billion in September to $1.1 billion in October.  Since variable annuities offer the potential for a market upside, they have been outselling their fixed annuity counterparts.

Low interest rates have really hurt sales of fixed annuities recently.  In the past, fixed annuities were at the top of bank brokerage programs, but have been competing lately with bank CDs.  The two products currently have the same interest rate of 1.63%, as a five-year average yield for one and an effective five-year rate for the other.  Equity linked CDs, a kind of hybrid of the two products, are becoming more popular because they carry benefits of both annuities and CDs.  The indexed CD products are selling more than fixed annuities for some of the same reasons that variable annuities are; that potential for a market upswing is drawing investors in.  Financial experts expect annuity sales to increase around tax time and to steadily climb from there.

In the Expert Click article “Fixed Annuities vs. CDs: Is One Better Than the Other?,” financial planner Greg Womack weighs the pros and cons of the different investments.  Whether fixed annuities or bank certificates of deposit (CDs) are best depends on each individual situation.  Investors can also look into equity linked CDs, which have some characteristics similar to both annuities and CDs.  CDs and fixed annuities are both safe investments, however unlike the FDIC insurance banks provide CDs, fixed annuities are backed by the insurance companies who sell them.  If you want to invest over the long term, annuities are more the investment for you because CDs tend to be useful for short term investments.

Consider the rate of return you will receive with your investment.  While fixed annuities and CDs tend to offer similar interest rates for similar products, the longer you hold an investment you usually receive more interest.  Since fixed annuities are meant for the long term, you most likely will get more guaranteed interest with this investment.  The equity linked CD criteria is different from both fixed annuities and traditional CDs because your interest is based on a stock market index, more like a variable annuity.  There are definitely tax benefits associated with fixed annuities, so if you have any concern over paying taxes the deferral and social security calculations offer great benefits with your annuity product over your CD.  Annuities are meant to provide you payments over your lifetime, while CDs are beneficial when you want to take a lump sum out at maturity.  Weigh the pros and cons of all investments with your future goals to see what investment is best for you.