With the stock market in steep decline, people are looking for
safe places to invest their savings. Many banks and investment
companies are pushing annuities. Annuities offer a higher
interest rate than CD's, but are they safe?
You could view an annuity as a tax deferred CD. You don't pay
taxes on the interest until you start drawing from the annuity.
But there are some important differences between an annuity and
a CD.
An annuity is a product offered by an insurance company. With
giant corporations like Enron, Kmart, Worldcom, and United
Airlines going bankrupt, can you guarantee that the insurance
company won't fold, leaving you with nothing? Insurance
companies are insured by re-insurers, like General Re. But it
seems no matter how large a company is, you can't be sure it
won't fold. The bankruptcy of a large insurance company might
cause the re-insurer to collapse along with it.
Bank CD's are insured by the Federal Deposit Insurance
Corporation (FDIC) for up to $100,000 per bank. The FDIC is a
branch of the U.S. Government, who, as you know, are the people
who print the money. If they go bankrupt, we'll have more to
worry about than just losing our savings!
A new type of annuity called a charitable gift annuity has come
on the market recently. These are issued by charity
organizations. You give your money to the charity, you receive a
tax benefit, and in exchange the charity promises you a fixed
payment for life. Unfortunately, this scheme has become a mode
of operation for con artists.
The charitable gift annuity has been added to top ten scam list
of the North American Securities Administrators Association.
They explain that charitable gift annuities are subject to
virtually no federal regulation. Here in Arizona, 430 investors
lost their savings in a ponzi scheme run by the Mid-America
Foundation Inc.
Banks and investment companies hawking annuities promote the
higher than CD interest rates, but they fail to reveal the
hidden fees and high early withdrawal penalties. If you need to
access your annuity before age 59½, you could be subject to a 10
percent penalty.
With the recent bankruptcies, and discovery that many giant
corporations have been cooking their books for years, I feel
it's best to play it safe. If you love the thrill of risk, or if
you have already purchased an annuity, I wish you luck. As Will
Rogers said, "I am not as concerned about the return ON my money
as I am about the return OF my money".
About the author:
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