Extended Guaranteed Savings Annuities
A Timely Alternative Investment for Your CD Ladder
May 5, 2009
Investors that are not satisfied with the current interest rates they are finding when Certificates of Deposit mature should take a look at Extended Guaranteed Savings Annuities (EGSA).
Similarities and Differences
Like a CD, an EGSA is purchased in one lump sum, but not from a bank or financial institution, but rather from an insurance company. Also like a CD, the insurance company promises to pay the investor a fixed percentage interest rate for the entire length of the term, after which the principal and interest can be totally withdrawn without penalty.
Advantages of EGSAs
- Tax deferred growth
- Limited penalty free withdrawals
- Probate avoidance upon death
Disadvantage of EGSAs
These annuities are not insured by the Federal Deposit Insurance Corporation (FDIC), and are therefore only as safe as the insurance company that issues them. However, there are many reliable insurance companies with substantial financial assets, and each state has a Department of Insurance that keeps a watchful eye on the long-term viability of insurance company products.
EGSAs on the CD Ladder
Many conservative investors embrace the concept of the “CD Ladder.” In simple terms, CD “laddering” means purchasing CDs with different maturity dates with the purpose of assuring the investor a planned flow of available cash.
Generally, when a CD matures, the investor has a “grace period” to withdraw the funds from the account before the CD automatically reinvests for a like term and at the then current interest rate. The grace period before the automatic rollover gives the investor an opportunity to close the account and remove the money, or seek higher yields from different institutions and/or different investment vehicles.
In today’s financial environment, most people find themselves settling for a lesser interest rate when renewing CDs. If they want to maximize the interest earned, it’s time to compare CDs and EGSAs. It may be that they will find enough of an interest rate variance to warrant adding EGSAs to their CD ladder.
CD vs. EGSA Example
USAA is the company selected for the example because it has a consistently high rating with all insurance company and banking rating services, and offers both CDs and EGSA products.
USAA members wishing to purchase a guaranteed rate and fixed maturity investment can select from the company's two, five, or ten-year maturity CDs or EGSAs. At the time of this writing, the USAA Insurance Company offers a five-year EGSA that pays 4.25% on a $50,000 investment. The USAA Savings Bank offers a five-year CD that pays 3.0% for the same $50,000 investment. That’s a difference of $625 per year in interest.
Whenever that kind of variance exists, it makes an EGSA worth exploring as an attractive addition to an investor's CD ladder.
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