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Equity-Linked Certificate of Deposits

People who prefer to invest their money in risk-free deposit account options tend to look at the standard banking products – high interest savings accounts, CDs, money market deposit accounts, IRAs, etc. Some may get a little creative and look into annuities. If you feel the need to have an equity-indexed annuity type of investment in your portfolio, chances are you would be interested in a little known investment called an equity-linked certificate of deposit. It's a lower cost alternative to annuities that allows you the peace of mind of having your principal deposit guaranteed by the Government yet still benefit from the growth of the market index.

Insurance agents selling equity-indexed annuities get up to 13% commissions! They often pitch these annuities to seniors because of their general risk avoidance tendencies, but some people lose out big time financially if they need to pull their money out sooner than planned. In addition to losing the 13% commission paid to the agent, people who must surrender their policies early end up paying steep surrender penalties and various fees to access their money.

A good alternative to annuities are equity-linked certificate of deposits. They have many of the same benefits that equity-indexed annuities offer, but fewer disadvantages- including far less fees.

Instead of purchasing an equity-linked certificate of deposit through an insurance agent like you would an equity-indexed annuity, you buy them from a bank and bypass the 13% agent commission. The equity-linked CDs pay returns based on the S&P 500 (or other stock market index) and they are federally insured up to $100,000 per individual by the FDIC, like all other certificate of deposit products. Equity-indexed annuities are not FDIC insured. There are a handful of equity-linked certificate of deposit options with a small $1,000 minimum, but the majority require a deposit of $25,000 or more.

You are 100% safe against losing your principal deposit in an equity-linked CD, unless you pull your money out before you've reached the end of your term. There will be a early surrender penalty of some form if you withdraw before the term, however, there aren't big commissions being paid to agents in order to open the CD so the redemption penalties are much smaller than you would pay if you had an equity-indexed annuity and needed to access your money earlier than planned. Equity-linked CD's have shorter term commitment options than equity-indexed annuities.

While the advantage of an equity-linked certificate of deposit are obvious, there is also a disadvantage to consider if you intend to invest in one. These CD's don't typically pay interest until they have matured, so if you're looking for an investment that provides steady income – you won't want to consider an equity-linked CD.

Why haven't you heard of equity-linked certificates of deposit before? It's simple: they don't have the large commissions that equity-indexed annuities and other investments offer agents, so they are not recommended as often. There isn't a financial incentive for the financial advisor to steer his or her clients toward an equity-linked CD.


James Morgan - Puritan Financial Advisor
James Morgan - Puritan Financial Advisor (anonymous)   |     |   Comment #2
They often pitch these annuities to seniors because of their general risk avoidance tendencies.
Jane Moore – Financial Puritan
Jane Moore – Financial Puritan (anonymous)   |     |   Comment #3
These complicated topics require careful thought. They are critical in formulating a successful strategic plan that ensures both a productive and enjoyable retirement.
Anonymous   |     |   Comment #4
MidAmerican Credit Union offers a good product.  You have a guananteed 1% p.a. return or any stock market return for 1/3/5 year terms.  No fee no commission.