The annuity, an often overlooked investment product, is enjoying a revival. But just because you're promised big payouts doesn't mean you should jump at the opportunity.
I was definitely surprised to hear about the comeback of annuities, so when I started taking a harder look at them, I found definite possibilities for investors to consider, along with some serious dangers.
Annuities, in case you don't know, are basically incomes that you purchase from insurance companies. You hand over a big wad of cash in the beginning, and the insurance company pays you a fixed stable amount for the rest of your life.
For instance, the company Presidential Life offers a lifelong immediate annuity that costs you three hundred grand up front, but will pay out just under two grand a month for the rest of your life. That means, in about fifteen years or so, you'll start making a profit on the annuity while getting a regular consistent income that isn't affected by interest rate fluctuations like CDs and bonds.
But there's a risk--that same company, Presidential Life, has a rating from AM Best, a consulting firm that rates insurance companies, of a B+. This may not SOUND bad, but considering that the top rating is A++, a B+ suddenly looks like an F. Especially if it's YOUR three hundred grand you just dropped with them.
See, some lower-rated companies will often offer higher payouts in a bid to get their hands on more capital to invest and of course pay their own bills with. They've been described as the equivalent of junk bonds, which also offer higher payouts due to enhanced risk. But with a little bit of searching and some careful planning, an annuity may be just the thing to protect your savings long term.
Unlike two weeks ago where we saw a steep drop in CD and savings rates, rates were mostly flat over the past week.
Savings Rates
Average savings rates held their ground last week, remaining at 1.37% APY. The top rates also remained the same with Southern Community Bank's Ready Saver 2% APY Savings Account leading the pack of non-promo rates. For promotional rates, Everbank remains on top with their 3-month introductory bonus rate of 2.25% APY. After the three-month period, the rate drops down to 1.26% APY for a blended one year APY of 1.51% APY
CD Rates
The average 1-year CD remained steady at 1.37% APY. First City Bank continued to hold the top spot with a 1.80% APY CD.. First City Bank is in bad financial shape and has been operating under a FDIC Cease and Desist Order since 10/09. Southern Commerce Bank has the next highest rate at 1.75% APY but as the BestCashCow rate tables show, it also has some financial problems.
The average 3-year CD rate, which had the biggest drop two weeks ago, remained at 2.52% APY. Bank United remains in the top spot with a 2.75% APY CD. Bank United is not yet rated because it is a relatively new banking entity, having emerged from the ashes of the old, failed BankUnited. The new bank has been recapitalized and appears to be in much better financial shape than it predecessor.
The average 5-year CD, which has been fairly steady since the beginning of the year, held steady at 3.19% APY.
USAA continues to have the top 5-year CD rate at 3.41% APY but it does have that $175,000 minimum balance. Everbank has the second highest rate at 3.39% APY. One thing to note about Everbank is their penalty for breaking a CD early. According to their terms:
"This penalty will be equal to one-fourth of the total interest that would have been earned on the principal balance of the account if funds had not been withdrawn prior to the maturity date." On a 5-year, 60 month CD, that's 15 months of interest.
The spread between average savings rates and 3-year CD rates rose slightly fro 1.14% to 1.15%. That means the average 5-year CD pays 1.15% more in interest than a savings account. The high for this spread was 1.24% in early March. The spread between 1-year CDs and 5-year CDs hit another record high last week. You can now earn on average 1.56% APY more in a high yield 5-year CD than a high yield 1-year.
I have come across a bank in New York offering a 2% savings rate, guaranteed through the end of the year. This offer beats any short term CDs.
A New York City-based bank is offering a money market account with a 2.00% APY guaranteed to last to 12/31/2010. It is only available through the branches (not on the internet). The bank is a small bank called Metropolitan National Bank which seems to only have offices at 46th and 5th, Park and 39th, Broadway and 36th and some remote place in Brooklyn.
This offer isn't well publicized. It is not mentioned on the bank's website or in the branches. I overheard someone asking about it when I was in 46th Street branch and the first representative denied that it existed although the second came up with some information. I then got the information and opened an account.
According to the information that I received, the minimum balance required to earn this APY is $2,500.
The bank has poor service even for New York, and seems to be rated on 2 stars on bankrate and 3 stars on Bauer. But, it is FDIC insured, and I'll put up with the bank's shortcomings to earn 2% through the end of the year (staying below FDIC limits, of course).
