Equity-Linked Certificated of Deposit: The Safer Low-Cost EIA Alternative
“Guarding Your Wealth” is a nationally syndicated weekly personal finance column written by Jeffrey D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group, a private wealth management firm that employs sophisticated proprietary strategies designed to protect and grow its clients' investments. Please visit our website, www.guardingyourwealth.com to read past articles in our archive.
(PRWEB) July 18, 2005 -- Equity-Linked Certificates of Deposit are a safer,
low-cost alternative for those who must have an Equity-Indexed Annuity type of
investment. These little-known investments allow you to participate in the
growth of the market index while your principal is guaranteed by the Government.
Read on to find out more.
Equity-Indexed Annuities are probably the most
heavily promoted investment for seniors in today’s marketplace. The sales pitch
is appealing and the payoff to the agent is very big—up to 13%. The enormous
commissions have led to sales abuses which leave seniors holding the
bag.
Readers of this column have wised up to the flaws of Equity-Indexed
Annuities. But what are the alternatives?
The best alternative to
Equity-Indexed Annuities is to use a diversified mix of investments and
strategies that can provide an income stream between 6% and 10% while limiting
any risk of significant loss. That’s what I do for my clients—without long-term
time commitments or surrender penalties if they want access to their
money.
Another alternative is called an Equity-Linked Certificate of
Deposit. They provide virtually all the benefits that Equity-Indexed Annuities
are designed to provide, without all the negative strings attached.
Equity-Linked Certificates of Deposit are offered by banks. They pay a
return that is based on a stock market index, usually the S&P 500. Just like
all Certificates of Deposit, they are federally insured by the FDIC up to
$100,000 per individual. The minimum purchase for an Equity-Linked Certificate
of Deposit is usually $25,000, but some can be found with $1000 minimums.
The return is based on the average performance of the S&P 500 over a
set period of time. Just like Equity-Indexed Annuities, how the return is
calculated depends on the issuer. The returns are all based on averaging the
gains or losses of the index at set points over the life of your contract. Some
Equity-Linked Certificates of Deposit guarantee a 3% return. Those doing so will
limit the index return. Others provide 100% of the calculated index return.
The only way you can lose your principal with an Equity-Linked
Certificate of Deposit is if you pull your money out before the end of the term.
Most will have some form of a penalty, but since there wasn’t a big commission
paid to an agent to sell it, the redemption penalties should be small. (Some
don’t allow early redemption so investigate before you invest.) All allow early
redemption without penalty if the account holder dies.
One of the major
benefits Equity-Linked Certificates of Deposit have over Equity-Indexed
Annuities is a short term commitment, FDIC insurance of principal, and much
lower fees. They allows you much more control and flexibility.
For
instance, let’s say you intend to invest $75,000 in Equity-Linked Certificates
of Deposit. Instead of putting all the money in a single CD, divide that money
between three--purchasing one each year for three years. Then as one comes due
you can roll it into another 3-year term. This will reduce the negative effects
in how the index returns are calculated while giving you access to $25,000 every
year.
There are several disadvantages to Equity-Linked CDs. They don’t
normally pay interest until maturity, so these investments are not a good choice
of those looking for steady income. And like Equity-Indexed Annuities, you don’t
really get 100% of the market gains because of the averaging used in calculating
the rate of return.
You may be wondering why you haven’t heard of
Equity-Linked Certificates of Deposit before. In fact, you should wonder why the
advisor recommending you buy an Equity-Indexed Annuity hasn’t recommended them.
The reason is they don’t pay a large commission so there isn’t a financial
incentive for the advisor to do so.
Check with your local bank to see if
they offer Equity-Linked CDs. Not all do, but they are becoming more widespread.
Any broker or advisor that can sell bonds should also have access to
Equity-Linked CDs.
I still believe there are better ways to invest your
money than Equity-Linked CDs. But I’d much rather see someone invest in them
than an Equity-Indexed Annuity. Don’t let advisors who stand to gain so much
from your money pressure you into investing in an Equity-Indexed Annuity when an
Equity-Linked CD is a much better alternative.
Have a financial question?
I’ll personally answer it. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’.
In
addition to being a nationally syndicated columnist and Certified Financial
Planning Practitioner, Mr. Voudrie provides personal, private money management
services to clients nationwide.
Looking for an energetic expert who is
passionate about financial and wealth management? Mr. Voudrie is an excellent
speaker who will excite and inspire your audience. Mr. Voudrie is available for
a limited number of speaking engagements, television appearances and radio talk
shows. For booking information, email e-mail protected from spam
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Related Articles can be found at www.guardingyourwealth.com under the Guarding Your Wealth
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Consumer Alert: Equity Index
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Source : http://www.prweb.com/releases/2005/7/prweb261981.htm