How much cash is the average American holding? According to Personal Capital, “50-somethings had a median cash balance of $96,726, while the median cash balance among those in the 60s was $119,289.”1 Given the recent interest rate increases, it would suggest that there would be a corresponding increase in short-term savings account interest rates. However, the national average interest rate for savings accounts is 0.16 percent, according to Bankrate.com’s Oct. 26 weekly survey of institutions.2 What other options exist for clients seeking capital preservation and competitive rates? Let’s consider some options.
Market-linked CDs are securities and are sold by prospectus. ESI requires a registered representative to have a series 7 to offer market-linked CDs to their client. Market-linked CDs are structured to participate in the potential growth of various indices, which could be comprised of equities, bonds, commodities, or other asset classes. If they are held to maturity, market-linked CDs offer principal protection and are insured by the FDIC. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.3 If held to maturity, and the underlying investment / index declines, the principal is returned without an interest credit. If the underlying investment / index increases, an interest credit is earned – subject to a cap on the earnings. Why would a client invest in a market-linked CD as opposed to a traditional CD? A traditional CD will pay a fixed interest rate, which is normally guaranteed by the issuer, while a market-linked CD offers the potential to earn a higher return based on the performance of the underlying markets. The amount of the potential interest credit, which is subject to a cap, will vary based on the duration of the CD. If the investor needs to access the capital prior to the end of the duration, a penalty or market value adjustment may be assessed.
Multi Year Guaranteed Annuities (MYGAs) are not securities. MYGAs are contracts issued by insurance companies. MYGAs are contracts issued by insurance companies that offer a guaranteed interest rate for a period of years. At the end of the period, (e.g., 3, 5, or 7 years) the rate will renew for the next guaranteed period. Due to the recent increase in interest rates, MYGAs have now become more attractive alternatives for clients seeking capital preservation and a competitive interest rate. In some instances, MYGAs are paying guaranteed rates in excess of 5%. Other than the interest rate, what other factors should a client consider before buying a MYGA? When will the proceeds be needed? These are annuity contracts which means that access must be deferred to age 59 ½ or later to avoid penalty. What are the financial ratings of the insurance company? Is the company financially strong? MYGAs are contractual obligations to pay interest. Is the company investing in high-quality investments? How are they generating their investment returns? Do they have a track record or paying attractive renewal rates? These are all factors to consider before purchasing a MYGA.
Fixed Indexed Annuities (FIAs) are not securities. FIAs tend to have longer surrender periods than MYGA’s 7-10 years, but also offer the potential to have a higher interest credit. FIAs have also been a beneficiary of the recent increase in interest rates. Caps have materially increased throughout 2022, and in some cases now exceed 10%. Considering that FIAs protect principal invested with a 0% floor, the potential for a 10% interest credit can be very attractive to a conservative investor. Again, like MYGAs, potential clients should consider when access to the capital is needed. What is the track record and reputation of the issuer? Have they demonstrated renewal rate cap integrity? Although index interest credits are not guaranteed by FIAs, what are the financial ratings and quality of the issuer’s balance sheet? All of these should be considerations for potential FIA buyers.
As a proven leader in the annuity marketplace, National Life Group offers competitive solutions with rates that remain strong. Click here for current rates.
If you would like to learn more about National Life Group’s MYGA and single premium FIAs, please contact the NLG Sales Desk at 1-800-906-3310, option 1 or view the eKit at https://resources.nationallife.com/ekits/fit-spda/.
1 Personal Capital, September 27, 2022
2 What is the average interest rate for savings accounts? Bankrate.com, 10/27/22
3 FDIC, Deposit Insurance at a Glance
TC133433(0523)1