Low Interest Rates on FDIC Insured Bank CDs Have Savers Looking at Insurance Products

Author: | Posted in Interest-Rates No comments

Like a Certificate of Deposit (CD), an Extended Guaranteed Savings Annuity (EGSA) is purchased in one lump sum, but not from a bank or financial institution, but rather from an insurance company. Also like a bank CD, the insurance company promises to pay the investor a fixed interest rate for the entire length of the term to maturity, after which the principal and interest can be totally withdrawn without penalty.

Advantages of EGSAs

> Tax deferred growth

> Limited penalty free withdrawals

> Probate avoidance upon death

Disadvantages of EGSAs

These are annuities, and are not insured by the Federal Deposit Insurance Corporation (FDIC). Therefore, EGSAs are only as safe as the insurance company that issues them. However, there are many reliable insurance companies with substantial financial assets, and each state has a Department of Insurance that keeps a watchful eye on the long-term viability of insurance company products.

EGSAs on the CD Ladder

Many conservative investors embrace the concept of the "CD Ladder." In simple terms, CD "laddering" means purchasing CDs with different maturity dates with the purpose of assuring the investor a planned flow of available cash.

Generally, when a CD matures, the investor has a "grace period" to withdraw the funds from the account before the CD automatically reinvests for a like term and at the then current interest rate. The grace period before the automatic rollover gives the investor an opportunity to look at different maturity dates that may enhance the interest rate. During the grace period, the investor can also close the account and remove the money, and seek higher yields from different institutions and/or different savings vehicles.

In today's financial environment, most people find themselves settling for a lesser interest rate when renewing CDs. If they want to maximize the interest earned, it's worth the time to compare CDs and EGSAs. It may be that they will find enough interest rate variance to warrant adding EGSAs from a top rated insurance company to their CD ladder.

Before you act on any financial advice that you read here or elsewhere, be sure to seek the counsel of your financial, and/or tax adviser. There are many roads to financial prosperity, get to know all your options.