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Ask Safe Money
Sam & Safe Money Sue
Q: If I have 5 $100,000 deferred annuities with 5 different insurers,
do I really have an aggregate of $500,000 insurance through my Maryland
Guarantee Association?
| Sam: We were
hoping to get a definitive answer from the Maryland Guaranty Fund
Association http://www.mdlifega.org/
but I'm afraid they were not very responsive. Their website says
annuity coverage is limited to $100,000 per insured if an
insurer goes bust, but it does not address your question (have you
considered moving?) |
Sue:
From reading Maryland Code Sections §9–403
to 405 it appears that the annuity guaranteed cash value is
covered up to $100,000 for each failed company. So, if an insured
had 20 $100,000 fixed annuities at 20 different companies the
Maryland Guaranty Fund could be on the hook for $2 million.
However, after several go arounds with the Maryland Guaranty Fund
folks trying to get a specific response to your question I am left
with this quote from them "If, as indicated, the regulations
and the law is unclear or silent, a decision would be made, at the
time, based on the best available information.". So the
answer is - nobody knows.. |
Q: I have a 5-year CD valued at 1,000,000
with an Annual Percentage Yield of 4.3% over 5 years. I have had it for 2.5 years and would like to withdraw all the money,
would I be penalized for this withdrawal?
| Sam: Probably, but only the
bank knows how much. Altho the typical penalty for getting out of a
CD early is the loss of 6 months interest - which could be 2.15% or
$21,500 in your instance - the penalty may be as low as 7 days
interest or as a long as a year's worth. The bank can tell you what the exact
penalty is. |
Sue: Unless you
have a "brokered CD". These are often purchased thru
stockbrokers and often cannot be cashed in early but must be sold,
in which case you would receive the market value. |
Q: What penalties will I incur if I withdraw
$10,000 from my annuity?
| Sam: Your
annuity contract will tell you. If you are past the early withdrawal
penalty period no withdrawals would be subject to charges (this does
not include two-tier annuities which can have withdrawal conditions
for the life of the contract). Most annuities permit you to take out
10% per year of the total value without charges, so if the annuity
value was over $100,000 the $10,000 withdrawal would be
penalty-free. Some annuities allow unused annual penalty
free-withdrawal periods to add up (if you don't withdraw 10% this
year you may withdraw 20% next year). |
Sue: Your
annuity agreement will tell you how much you may withdraw and what
any penalties may be. You could also call the insurance company and
ask them. You should be aware we are only talking about insurance
carrier penalties, tax considerations are another matter and you
should talk to your tax advisor about your personal situation. |
Q: Would I get a higher return if I took out
the balance of a fixed annuity as a lump sum or annuitized it and received
monthly payments over a period of years?
| Sam: Assuming you do not have
a need for the entire balance today it would depend on which was
higher - the yield you would earn on the annuitized payments or
what you could earn on the lump sum. Another factor is taxes.
Interest earned in an annuity is taxed when received. In a lump sum
all the interest would be taxable at once, but if it is annuitized
the taxable interest is spread over the periods. If the annuity is
properly exchanged for a new one and no money is withdrawn, taxes
are not due at that time. |
Sue: Often the
effective interest rate today on period certain payouts - which is
what you are taking about - ranges from 2% to 4%. To determine the
yield you would earn you need to know the monthly payment (PMT), the
principal amount (PV), and the number of months (n). And then use a
financial calculator to find the interest (i). |
Q: If a certificate of deposit is listed with both mother and daughter
on it how is it treated if one passes away?
| Sam: Wikipedia
says a joint tenancy with right of survivorship or JTWROS is
where the joint owners have a right of survivorship, meaning
that if one owner dies, that owner's interest in the property will
automatically pass to the remaining owner or owners. http://en.wikipedia.org/wiki/Joint_tenancy |
Sue: The bank
can set up ownership of the account to meet your wishes. And since
we do not give legal advice your attorney can provide the right
answers. |
Q: My wife and I have a joint checking
account with Capital One and then we each have our own Capital One Money
Market account. The checking account is Capital One but at a different
bank than the Money Market account.
1. What is meant by "different bank"?
2. Would our joint checking account be insured up to $100k each person?
3. Or would our accounts be insured up to $100k each adding the
funds in Money Market accounts plus the checking account?
| Sam: If you go
to FDIC.gov, click on the box Deposit Insurance and
then hit Bank Find, you can type in the name of the bank and
see whether it is FDIC insured. There are two separate FDIC entities
listed for Capital One: Capital One Bank with 2 domestic and 2
foreign branches; and Capital One, National Association with 718
domestic branches.
1. If your money market accounts were at branch 713 and your
checking accounts were at branch 234 of Capital One, N.A. they would
all be lumped under the same one bank FDIC protection. However, if your
money market accounts were at Capital One Bank and your checking
accounts were at Capital One, N.A. you might possibly be covered by two different banks and two different FDIC
coverages. |
Sue: 2. Each
person on a joint account is covered for up to $100,000, so you and
your wife would have maximum coverage of up to $200,000.
3. If you are all at the same bank entity your money market
account is insured for up to $100,000, your wife's money market
account is insured for up to $100,000, and your joint checking
account is insured for up to $200,000. You could have up to $400,000
FDIC insured at the one bank.
I will add the caution that we don't guarantee this is accurate, and the best thing would be to contact the bank
or FDIC for answers to specific situations. |
Q: What is a surrender period?
| Sam: A surrender period is a
deferred annuity term for the time in which a penalty is imposed if
you withdraw your money. A very few annuities have no surrender
period - you may withdraw all of your money at anytime without
charge. A very few annuities have a surrender penalty that lasts
forever - the only way to avoid penalties to is to take the value
out over time (annuitize the annuity). The vast majority of
annuities have a surrender period lasting 5 to 10 years. |
Sue: The vast majority of deferred
annuities permit you to take out 10% of the value each year without
penalty (altho the IRS gets involved with the interest received).
Other safe money places with surrender periods are Savings Bonds - 5
years, and certificates of deposit - where it is known as a penalty for early
withdrawal). |
Q: If I have an
FDIC insured account and the bank goes bust when can I expect to receive
my money?
| Sam: In every situation I
looked at your
money was immediately available in the new bank that the FDIC had
persuaded to take over the accounts of the failed bank. |
Sue: This was only true if your account was
fully covered by FDIC. If your account was over FDIC limits the
excess money is treated as if it were a debt to the bank, and you
will receive money as bank assets are sold. This process can take
years and often results in getting back less than 100 cents on the
dollar (but only on the uninsured deposits). |
Q: I have $220,000 to put into an index
annuity, would this yield $1,200 a month?
| Sam: Receiving $1,200 and leaving
the $220,000 intact would require an annual yield of 6.55%. If you
earned 6% the money would last for 43 years, if you earned 5% the
money would last 30 years, and if you earned 4% the money would last
25 years.
Could an index annuity earn 4%, 5%, or even 6.55% over time? For
that matter, could any financial instrument earn these rates over an
unpredictable future? Maybe, maybe not. |
Sue: Because of this uncertainty
more and more index annuities are offering something called
Guaranteed Lifetime Withdrawal Benefits or GLWBs. What a GLWB does
is the insurance carrier guarantees that you will receive at least a
specific percentage payout for as long as you live even if the money runs,
but unlike annuitization, it still gives you access to your money.
For example, an index annuity with a GLWB might guarantee a
withdrawal rate of 6% a year. Say the index annuity did poorly and
your account ran out of money - the annuity company would continue
to pay 6% a year until death. Say the index annuity did well and
earned over 6% a year - either you or your heirs would
benefit.
GLWBs are the story in the current
newsletter. |
Q: Is an IRA multi-account rule better than
a trust? What do you think is the true rate of US inflation? I am 58, does
using some IRA money to buy an immediate annuity make sense?
| Sam: We get a
lot of questions like the ones above, but we don't feel comfortable
answering them. The first question is asking legal advice, and we're
not lawyers. I'm not sure if the second question is asking what is
the inflation rate - which is available at http://www.bls.gov/cpi
- or a philosophical question on inflation, but we don't do
philosophy. We consider that the third question is asking for
investment advice, and we don't give that out either. |
Sue: We try to
answer "how", "what" and "why"
questions, as in "how does it work, what does it do and why
might someone do it".
The reason why someone might purchase a fixed immediate annuity
for life is to establish a regular income that will not run out due
to market losses or how long you live. This income could be a
baseline to help ensure that basic needs are always covered. The
major negatives in selecting an income annuity are usually that the
income stays the same and does not increase with inflation and that
when you die the income stops and the money is gone. However, there
are types of immediate annuities that can increase future income and
ensure that you get back at least what you put in.
Do they make sense for your particular situation? We don't
know, which is why you need to talk with someone that can look at
your whole picture. |
Q: Does the company holding my annuity keep any that is left in it upon my death?
| Sam: In a deferred annuity,
no. The insurance company pays the annuity balance to the named
beneficiary. If the annuity is an immediate annuity (also
known as an income annuity) where a person has annuitized and is
receiving regular payments the payments usually stop upon death; the
two exceptions are a period certain annuity that will
continue to make payments until the period is over, and an
installment refund immediate annuity that promises that if the
payments already made do not equal the original premium the insurer
will cut a check for the balance and effectively ensure that 100% of
the premium is paid out. |
Sue: I'll repeat
that. In a regular deferred annuity the annuity balance is
paid out in full to the beneficiary. The only exceptions are
the handful - and I mean a very few - annuity companies that will
charge a surrender charge upon a death.
The California Insurance Department released an annuity
report that says "in a
fixed annuity the amount remaining in the annuity at the annuitant
’s death stays with the insurance company." This
is WRONG - it would only be true if you chose the most
restrictive annuitization payout option. The
insurance company DOES NOT KEEP YOUR MONEY IF YOU DIE
when you own a deferred fixed annuity. We hope California fixes this
incredible misstatement soon.
|
Q: Is it true that a "fixed index annuity" is protected and guaranteed through a state guaranty association?
Q: How may a death in a family affect FDIC insurance
coverage of bank accounts for which the deceased was a co-owner or
beneficiary?
| Sam: The FDIC Guide Your
Insured Deposits says FDIC insures a deceased person’s
accounts as if they were still alive for another six months. So, a
regular joint account that was insured for $200,000 would drop to
$100,000 in insurance six months after the death of one of the joint
owners. |
Sue: There is no
grace period if a beneficiary (or all beneficiaries) of a POD
account or most revocable trusts passes away. If you have specific
questions, you should talk with the people at your local bank. |
Q: I have $300,000 in a qualified IRA, 2 years remaining before no
penalty. With $12,000 penalty if withdrawn now, and a 10% bonus on remaining
$'s, is it advantageous to choose a fixed index annuity that requires 17 yr
commitment. I'm 68.
| Sam: The real
question is, in connection with your other resources do you feel you
would have enough liquidity to meet your needs? Although most
annuities allow penalty-free withdrawals of 10% of the value each
year and many waive liquidity penalties upon a death or if long-term
nursing care is required, only you can decide the degree of
liquidity that is needed. |
Sue: One should
remember that an upfront bonus is essentially prepaid interest and
is not "extra" money. If you have two identical annuities
and one offers a 10% upfront bonus and the other doesn't, the
non-bonus annuity should pay higher interest in future years than
the bonus annuity until the money from the bonus is recaptured. |
Q: If I were to put $80,000 into a short term, three month CD, how much
interest would I earn on that? Assuming the APR was 5.25%.
| Sam: You'd earn
$2,073.26 in interest (if the interest is compounded
quarterly). |
Sue: An "APR" rate is the same as a
compounded rate. A nominal rate is the simple interest or
not-compounded rate. A nominal rate of 5.15% becomes an APR rate of
5.25% if it's compounded quarterly. To calculate this you divide the nominal rate by 4 (since we're
using quarterly compounding) so 5.15%/4 = 1.2875%. In 3 months you'd
earn 1.2875% interest you'd earn 2.5916% (1.012875 x 1.012875) and
in a year you'd earn 5.25% in interest (1.012875 x 1.012875 x
1.012875 x 1.012875) |
Q: It is my understanding fixed annuities
are not covered by the SEC, does any agency have oversight over the
insurance companies?
| Sam: The insurance departments of
50 states, 3 territories, 1 commonwealth and 1 district regulate the
insurance companies selling annuities in their neck of the woods.
They look at the policies, the customer materials, the financials of
the company and decide whether they will permit the company to do business
with their citizens. |
Sue: In addition to reviewing
forms and product filings, insurance departments regularly visit insurance
companies and spend days looking over what the
insurers do and how they treat consumers. If you'd like to learn
more the web site www.naic.org
provides information on insurance regulation. |
Q: Is a deferred annuity practical for applicants
over 65 years of age?
| Sam: Of course! |
Sue: A good question is what are your goals? A
fixed deferred annuity allows interest to grow on a tax-advantaged
basis. Unlike bank interest, the interest compounding in the annuity
is not subject to current income taxes and will not contribute to
Social Security Benefit taxation. Although income taxes will
ultimately be paid when the annuity interest is withdrawn, any taxes not
paid on your Social Security benefits may never be repaid.
Annuities have withdrawal penalties that vary in length and
severity, although most annuities let you access at least the annual
interest penalty-free. This means you should make sure your
liquidity needs match the liquidity offered by the annuity.
Annuities are a safe money place paying competitive interest
rates, guaranteeing a minimum return, and offer a wide range of
liquidity choices. Why wouldn't one be practical for those age
65?
|
Q: Are index annuities safe - what should we look for in a good
company - are local investing groups usually okay to use?
| Sam: I consider index annuities to be a safe money
place because both principal and earned interest are protected from
market risk, and to date no one has lost a dime because an index
annuity carrier went bust.
I would look for a company that was financially strong and there
are a list of companies that rate insurers linked
here. |
Sue: I would also ask the insurer for a record of how
previous index annuity owners have been treated - what interest have
owners actually earned since they've owned the annuity.
Good financial counselors may be found everywhere. Ask friends
for referrals (and ask the counselor for the names of a few clients
you can talk with). |
Q: The website called "CD InterestRate Scorecard" shows banks CD's with
interest rates at above 5%. Are these CD's safe
and if yes, for what period of years would it be "good" to purchase these CD's?
| Sam: If by safe
you mean are they FDIC insured you can go to http://www2.fdic.gov/idasp/main_bankfind.asp
type in the information about a bank, and FDIC will tell you whether
it is insured.
If you're asking whether uninsured deposits should be safe
you'd need to check out the bank ratings
section and get the independent ratings on the
banks. |
Sue: Selecting a
"good" CD term means gazing into the future. If rates will
continue to rise in coming years short-term
maturities let you roll the CDs into higher yielding ones, but if
today's rates are the high point in this cycle then it might make
sense to lock in rates for as long as one can.
Unfortunately, I'm not very good at predicting the future so I
suggest a concept we write about called yield
ladders. This technique means you don't have to guess which
direction rates will move. |
Q: Two of the EE bonds purchased were stolen. How do I file a claim for this loss.
| Sam: Bonds that are lost, stolen, mutilated, or destroyed can be replaced free of charge as long as
the Bureau of the Public Debt can establish that the bonds haven't been cashed.
To assure that the bonds can be traced, owners should keep records of bond serial numbers, issue dates, registration, and social security or taxpayer identification numbers in a safe place separate from the bonds.
|
Sue: To get your bond replaced, complete
Form 1048. On this form, provide the approximate issue date along with the complete names, addresses, social security number that appeared on the bond, and the bond serial number. If you don't know the serial number or denomination, just write "unknown" in the space provided. If the bond owner is a minor, the form should be signed by both parents and the minor's age and social security number should be included. Mail the completed form to: Bureau of the Public Debt, Parkersburg, WV 26106-7012. Replacement bonds will still show the original issue date |
Q: I'm 57 years old and already retired. I
have $500,000 cash. How can I generate $4000/month from this money?.
| Sam: If you put
$500,000 in a shoe box and withdraw $4,000 a month the money runs
out when you're 67 and a half. Alternatively, if you could net 9.6% a year you could receive $4,000 a month
forever and pass on the $500,000 to your heirs. If you can't average a 9.6% or
higher return you're going to need to make some choices with the
understanding that higher potential returns typically mean greater
risk of loss. |
Sue: If you earn
5% your $4000 monthly income lasts until you are age 73, 6% will get
you to age 74, and 7% will get you to age 77 - all of which may
present a problem because the current life expectancy for an age 57
male is 81 and 83 for a female. The most honest answer is if you
take out $4000 a month you could easily run out of money before you
die.
You either need more money or a smaller income. What's the best
blend of investments to accomplish this? Sorry, we don't offer
investment advice. |
Q: If I have more than $100,000 in a
passbook saving account am I only insured to $100,000 limit? How
about if it is a joint account? $100,000 per person for a total of
$200,000?
| Sam: Yup |
Sue: FDIC covers up to $100,000 in deposits for one
owner at one insured bank, but there are different categories of owners
that may allow one to increase coverage.
A more complete answer is available here |
Q: Are CD's paying interest based on a
market index a better choice than an indexed annuity from a strong
insurance company?
| Sam: Both
index-linked certificates of deposit and fixed annuities offer the
potential for more interest than you might earn in a fixed rate CD
or annuity. It really comes down to which place gives you the better
upside potential - which gives you better index participation.
Both the CD and fixed annuity are safe money places with the edge
going to the CD because of FDIC. |
Sue: I agree with Sam, and I
have couple of other points to think about. Interest growth within
the annuity is not taxed as current income. Interest growth in the
CD - unless the money is in a qualified account like an IRA - is
taxed. In addition, there are index annuities that guarantee to pay
more than the original principal at the end of the term even if the
index declines.
Although FDIC is very safe it is good to know that no one owning
an index annuity has ever lost money because the insurance company
failed. |
Q: How much does an index annuity pay?
| Sam: Whatever it
is, it could always be a little more, couldn't it. I've seen index
annuity returns back in the '90s over 40%! And there were some that credited
double digit interest rates last year.
|
Sue: Although index annuities
have once in a while produced a very high rate of interest for one
year, you need to remember that if the index goes down you may not
earn any interest for the next year. Index annuities have averaged
returns that are competitive with CD rates over the longer term, but this is not a
guarantee they will do so in the future. They will not produce
double digit interest rates every year, but if they earn 2%
more than another safe money place the index annuity will be worth
much more over time. |
Q: Does it make sense to put a fixed annuity
in a qualified retirement plan?
|
Sam: Absolutely not. When you buy a
fixed annuity you are paying for a tax deferral benefit and when you
put a tax deferred annuity inside a tax deferred retirement plan you
don't get double tax deferral you get one wasted tax deferral.
Why pay for something you don't need? |
Sue: You don't pay extra for the tax deferral.
Interest earned on fixed annuities grows tax-deferred because they
fall under the same tax-deferred umbrella of all long term savings
plans (which is why an IRA is also known as a Individual Retirement
Annuity).
I've found the main reason people
buy an annuity is for the potentially higher yield. If your IRA
choice was an annuity yielding 6% or a similar non-tax-deferred
vehicle yielding 4%, which one would you pick? |
|
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