Want to play the stock market without risk? FDIC insurance will help you do that.
The FDIC insures the “index-linked” CDs offered by some banks. These CDs pay interest based upon the overall performance of a stock market index, and your principal deposit is FDIC insured up to current limits (generally $100,000 and $250,000 for retirement accounts). Here’s an example of how one of these CDs works. Please note, however, that the various features of these CDs vary from bank to bank (e.g., maturity, interest rate determination, withdrawal penalties).
Here’s a hypothetical example. You make a deposit, say $10,000. The FDIC insured CD has a 3.75 year maturity, non-callable. At the end of 3.75 years, you would receive your deposit back plus interest based upon the movement of a pre-selected stock market index, such as the S&P 500.(1) Let’s assume that the S&P 500 index increases 3% per calendar quarter over the next 3.75 years. In this hypothetical example, you would receive $12,271. That’s equal to a 5.6% annual return. Had you invested in the S&P 500 index, you would have received 12% annually, plus dividends. But with the CD, even if the market drops, you still have your original $10,000 FDIC insured.
The attractive feature of such CDs is that you could earn a higher amount of interest than the fixed rates offered by most banks. However, you could earn zero if the stock market falls during the term of the CD. Your full deposit is always returned to you at maturity no matter what occurs in the stock market due to the FDIC insurance. Index-linked CDs are subject to early withdrawal penalties, and an investor is not guaranteed to receive 100% of his or her principal investment if funds are withdrawn prior to maturity. Also, an investor’s right of early withdrawal can be limited to certain dates.
Note that some varieties have a “cap” limiting the gain. For example, a 100% cap would mean that a $10,000 CD would not provide more than $20,000 no matter how large the gain in the stock market index. Others may have a call feature allowing the issuing bank to redeem the CD before maturity at pre-stated prices.
Yet others may have a “participation rate” where you partially participate in the index gain. For example, if the stock index rises by 100% and your participation rate is 50%, you enjoy only half of the market gain. All of these features are included in the descriptive materials. So read and understand them carefully before you invest. If consfused, take the description ot an accountant or financial planner for interpretation.
If you think that the stock market performs well over the long term, index-linked CDs could interest you. It’s an opportunity to participate in potential market gains and to protect your principal from market losses. But some people may still opt for the traditional CD with its fixed payment of 3 to 5 % (Bankrate.com’s national average rate for five year CD was 3.39% as of 2/04/08).
If today’s CD rates leave you yearning for a higher return with safety, FDIC insured index-linked CDs could be for you.
That sound slike a great idea when the market is this low or whn it bottomed out a few months ago. I will have to look at some of the cds they sound interresting thanks.
I have never heard of this kind of CD before. Very interesting. I guess it is less risky as your principle will always be preserved. Of course the upside is no where near as good as if you were invested in a particular part of the stock market.
I’m actually glad to find this post I have been barking on about making sure your savings are insured by the FDIC (FSCS in the UK.) for a long time. This is usually structured deposits however what you are proposing is a structured investment the chances of gaining a great return is there and you can never lose a penny. You get all the excitement of the stock market without the risk this is highly recommended.
Hi – This is a valuable phrase that “all investments have their good and bad points”. But here you have to judge the percentage and the quality of good and bad points. I mean here we can see that if we become little bit of alert before investing then we get the benefit for the life time. So first of all we need to choose a reliable insurance company or a well known bank for our investment then look for the policy. I think annuity is a must needed part of our life, as it will become a stick in our old age. By the way this post is really well executed, I must give full credit to you.
For some reason I have always neglected index-linked CDs. I will need to take a closer look at it again. Thank you.
Now in upcoming year in Point-to-Point Appreciation with Maximum Cap & Minimum Interest, interest is paid at maturity based upon the increase in the index over the term from the starting index level to the final index level. The upside increase is capped at 65% to 75%. If the index is up less than the minimum, or is down, the minimum rate of 7.00% per full term will be paid at maturity. FDIC insured.
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