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Savings Alternatives in a Low Interest World | Cary Curzon

Since the height of the financial crisis in 2008 interest rates are a frequent topic of discussion. If you are in a position to borrow money, purchase a home or refinance a mortgage, you love these historical low rates. This is a great time for a borrower but if you are a saver you are getting crushed!

It was not long ago when a saver could earn between 4.0% and 5.0% on a 1 year bank certificate of deposit. This is significant since many retired Americans depend on the monthly income from these CDs. Today, the interest rate on a 1 year CD is less than 1.0% and many banks have 1 year rates hovering around 0.40%. A retired saver has seen as much as an 80% reduction in interest income from their CDs. This low rate environment may not change any time soon with the Federal Reserve continuing to hold rates at these extremely low levels.

What Does a Saver Do? A saver who does not want the volatility of the stock market is not left with many options. U.S. Treasury bonds are yielding less than the inflation rate with a 2 year Treasury paying just 0.35% and a 5 year Treasury bond paying close to 1.40%. Reported inflation rates have been relatively low over the last several years but with central bank policies, extreme droughts affecting our agriculture market and unpredictable energy costs, the prices for our basic needs may be rising faster in the near future.

Within this low rate environment, some savers have turned to the insurance industry for alternatives.

Single Premium Whole Life
A few insurance companies offer a whole life product that allows a single deposit. The total 5 year yield on this product can range between 2.0% and 3.0% depending on guaranteed interest and company dividends, which are not guaranteed. Other factors affecting yield are your age and amount of deposit. Generally, the higher the deposit, the higher the yield. The most attractive feature is that the cash value is accessible within 2-3 years. If you allow the interest to accumulate, it will be tax-deferred until withdrawn. This product offers many features a saver is looking for; safety, liquidity and higher yields than traditional accounts like CDs and government bonds. It is a life insurance product which means you would need to qualify with a medical exam. This type of product is not eligible for IRA money.

Tax Deferred Annuities
Insurance companies also offer single deposit tax deferred annuities. These products are savings accounts with the insurance company that offer guaranteed interest rates. You can decide if you want to defer your earned interest and let it accumulate or have your interest paid to you each month. If you decide to defer your interest you are not taxed until it is received. These annuities typically have a contract period of 3, 5, or 7 years.  A 5-year deferred annuity today may yield close to 3.0% which is very attractive compared to other 3-5 year terms.   Fixed Annuities  offer safety, guarantees and competitive rates. One perceived drawback is you lock into a long term contract and if rates rise during your contract period you will not be able to move your principal out without a penalty before the end of the contract period.

Immediate Annuities
With immediate annuities you transfer a lump sum to an insurance company in return for a stream of income for either a fixed period (5 or 10 years) or for a lifetime. The dollar amount of the payout depends on your payout period and your age. For example, a 62-year-old male who transfers $100,000, could receive $6,290 per year for life. A 70-year-old male with the same transfer could receive $7,540 for life. The risk with this type of annuity is dying before you receive your original deposit back. A lifetime payout is for life whether you live only one year or live to be 100. You can reduce this risk by adding a survivor feature and your payments continue to a spouse or other beneficiary for their lifetime. This will reduce your annual payout but will insure the payment continues to the joint contract holder.

When it comes to earning higher yields and more interest income in this low interest world it is important to learn as much as you possibly can about the alternatives available to you. It may be appropriate to split your savings and retirement funds into different methods and alternatives to benefit from advantages offered by each product. It is advisable to consult with a financial professional and a tax advisor to discuss your own personal needs.


Cary Curzon
President | Delta Trust Insurance Agency, Inc.

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