Both CDs and deferred fixed annuities aresavings vehicles used
by individuals toaccumulate wealth. However, these twoproducts are
quite different; each has itsown unique strengths and uses. For the
sakeof comparison, let’s look at two similarversions of these
products – an individuallyowned, non-tax qualified bank CD and
anindividually owned, non-tax qualified singlepremium deferred
annuity earning anannually renewable fixed rate of return.
Review the list of objectives and identifythose which are most
important to you. Thiswill help determine which of these
twoproducts – CD or deferred annuity – is bestsuited for your needs
at this time.
ObjectivesSafety of Principal: Both CDs and deferredannuities
are considered low-risk investments.CDs are generally issued by
banks and, inmost cases, are insured by the FederalDeposit
Insurance Corporation (FDIC) forup to $100,000 per depositor.
Should thebank fail, the FDIC guarantees CDs up tothis amount.
Deferred annuities, on the other hand, areissued by insurance
companies and are notinsured by the U.S. government. They arebacked
in their entirety by the financialstrength of the issuing insurance
company,regardless of the amount. Before purchasingan annuity
however, you should make surethe issuing insurance company is
financiallysound. You can determine financial stabilityby
requesting the findings of independentrating companies such as
Moody’s, A.M.Best, Standard & Poor’s and Duff & Phelps.
Short-Term Accumulation: When decidingbetween a CD and a
deferred annuity, yourinvestment horizon should be a key
factor.Your investment horizon is the amount oftime you need to
save for a specific goal. For
CD vs. DeferredAnnuity
W H I C H B E S T M E E T S Y O U R N E E D S ?
They’re both qualityfinancial tools. If you’redebating whether
the bestplace for your money is acertificate of deposit (CD)or
deferred annuity, theanswer depends upon yourindividual financial
situationand investment objectives.
short-term goals, such as a down paymenton a home, a new car or
a vacation, a CDmay prove to be a better choice for you. Inmost
instances, you can select a maturitydate for your CD that
corresponds to yourtime horizon. Maturity periods can be asshort as
one month or as long asseveral years.
Long-Term Accumulation: On the otherhand, a deferred annuity is
generally theproduct of choice for the long haul. Deferredannuities
are designed to help accumulatemoney for retirement or to protect
fundsalready saved up once you ’ve reachedretirement. They can even
be used toprovide a legacy for your heirs. In lateryears, a
deferred annuity is usually moreflexible for accessing your
money.
Interest Return: CDs offer a guaranteed rateof return for a
specified period of time.Interest rates will vary depending on
currentmarket conditions and the length of time tomaturity.
Generally, the shorter the period oftime to maturity, the lower the
rate. There isno guaranteed minimum for renewal rates.
With a deferred annuity, a guaranteed interestrate is locked in
for an initial period, usuallyone to three years. After that,
interest ratesmay be adjusted periodically, generally eachyear.
Because annuities are long-term vehicles,their interest rates tend
to be higher thancomparable CDs.
Deferred annuities also offer a guaranteedminimum interest rate.
Regardless of marketconditions, the annuity will pay at least
theminimum guaranteed rate established at thetime of purchase. In
addition, some companiesoffer a “bailout” rate to protect
againstexcessive year-to-year rate fluctuations.
Tax Savings: If taxes are a concern, adeferred annuity may be a
better option forseveral reasons:
Earnings on CDs are taxable in the yearthe interest is earned
even if you don’ttake the money out. With deferredannuities, on the
other hand, earningsaccumulate free of current taxation.Earnings
inside an annuity are not treatedas taxable income until they are
with-drawn. This allows more of your moneyto work harder towards
achieving yourlong-term goals and gives you a measureof control
over when you pay taxes andhow much you pay. This tax
deferralfeature is one of the greatest advantagesof deferred
annuities.
As you can see from the chart below,when saving for the long
term it makesgood investment sense to have the powerof tax deferral
on your side. Keep in mindthat withdrawals from the earningsportion
of a deferred annuity are taxable and,if you’re under age 591⁄2,
these earnings maybe subject to a 10% tax penalty.
Deferred annuities may also help reduceor eliminate the taxes on
your SocialSecurity benefits. By leaving your moneyin a deferred
annuity you can reduceyour taxable income, keeping it below the
level where you would begin to owetaxes on your Social Security
benefits.But with CDs, your interest earningscount in the
calculation to determinehow much of your Social Security bene-
fits will be taxed – even if you don’t with-draw the earnings.
As much as 85% ofyour Social Security benefits could endup subject
to taxation.
At death, the annuity’s account value will bepaid directly to
your named beneficiary(ies),avoiding the costs and delays
associatedwith the probate process. This is not thecase with a CD,
which is included inyour estate. When purchasing a deferredannuity,
look for one that distributes thefull account value to
beneficiaries. Somecompanies apply surrender charges ondeath
benefit proceeds.
Liquidity: If you need access to the fundsin a CD prior to the
maturity date, youmay pay an interest penalty ranging from30 days ’
to six months ’ interest. Ofcourse, you can limit your exposure
tosurrender penalties by investing in severalCDs with staggered
maturity dates.
A deferred annuity also providesyou with access to fundsshould
the need arise. Mostcompanies will give you theflexibility to
withdraw a por-tion of your deferred annu-ity’s account value,
usually10% each year, without acompany-imposed surrendercharge.
Withdrawals fromdeferred annuities can bemade in response to a
onetime cash need or set upsystematically to respond toa continuous
need. In fact,
most deferred annuities offer theopportunity to systematically
withdrawfunds on a monthly, quarterly, semi-annualor annual
basis.
Keep in mind that deferred annuities aredesigned to build your
retirement nestegg. Withdrawals of earnings prior to age591⁄2 may
be subject to a 10% penalty tax.Plus, most insurers assess a
surrender
charge if the contract is terminatedduring the first several
years.
Distribution Options at Maturity: When aCD reaches its maturity,
you can takethe CD’s lump sum value in cash, renewthe CD for the
same or different maturityperiod or examine other
investmentalternatives (such as a deferred annuity).
In a deferred annuity you may elect towithdraw your money in a
lump sum oryou may want to select a lifetime incomeoption, which
will provide you with aconsistent flow of income that youcannot
outlive. Or, you can simply electto let your funds accumulate until
aneed arises.
These are just a few of the factors toconsider when making your
selectionbetween a CD and a deferred annuity.Depending upon your
investmenthorizon, you may want to allocate aportion of funds to a
CD to cover short-term needs and a portion to a deferredannuity for
the long term. For moreinformation about annuities, contactyour New
York Life agent today.
Issuer: New York Life Insurance and AnnuityCorporation (A
Delaware Corporation)
New York Life Insurance CompanyNew York Life Insurance and
AnnuityCorporation (A Delaware Corporation) 51 Madison Avenue New
York, NY 10010
www.newyorklife.com
13475 (3/00)
