How to Earn More – FDIC Insured CDs part 1

Callable CDs

“Callable CDs” are a variety of CDs that often pay more than regular (non-callable) CDs. These CDs come with Federal Deposit Insurance Corporation insurance (FDIC), full principal repayment at maturity and above-average yields.  These insured CDs appeal to safety-conscious retirees looking for income.

Although FDIC insured, that does not mean they are not without risk. These FDIC insured CDs have features you must understand. Before you jump at the rate offered by some ad in the Sunday newspaper, here’s what you need to know about the features offered:

High Rate
The higher rate could be temporary. Some callable CDs are callable after a year or two, which means you can get paid off and your high rate stops. Although your principal may still be insured by the FDIC, you may be required to find another place to invest your money which could subject your investment to interest rate risk (i.e having to accept a lower rate than you were earning). Although the bank could have the option to pay you back after one or two years, you do not have the same flexibility.  If you want to terminate your deposit, it could cost you as described below.

Banks offer FDIC insured callable CDs to shift interest rate risk to the depositor. Because the depositor is taking on this interest rate risk, a callable CD will have a higher yield than the same maturity CD without a call provision. The additional yield is partial compensation for the depositor accepting the interest rate risk. Callable CDs typically have terms of 10 or 20 years. Therefore, these CDs are typically suitable for someone who does not need liquidity and wants higher returns than a non-callable CD and the safety afforded by the FDIC protection. Consider that earning more on your money could reduce the need for you to tap into your principal investments. If you buy such higher-paying CDs, it might be wise to keep other money for liquidity available in a money market account or bank account.

Although money market accounts are typically considered to be safer than many equity investments, money-market shares are redeemable at net asset value, which may be more or less than original cost. An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in such a fund.

These callable CDs are suitable for:
• People who want to protect their “core” principal that they never want to spend
• People who want to leave money for heirs
• People who need to safely maximize income
• People who have adequate liquid resources

Take these precautions:
Some retirement planner may tell you that you can sell these CDs at any time. It is true that most banks will buy back the CD from you but it could be at a steep discount. The ONLY way to be sure to get all of our pricnciapl back is to hold the CD to maturity (could be 10+ years) or until called by the bank. With respect to principal repayment, the bank’s obligation is to pay you back at maturity.

You may be told that if you pass away before the CD matures, your heirs can “put” the CD back to the bank and get the principal. This offer however is dependent upon the bank having enough funds in the “put” pool. Your heirs will have priority but could wait to see cash, months if not years.

To find callabale CDs at 6%, just do a Google search on “callable CDs” and you will encounter many offerings.  This site does not require any login http://www.bergencapital.com/clientservices/inventory/cd_inventory_new_issue.htm