Cash Alternatives

For those looking to keep their money safe and liquid; savings accounts, CD’s, and money market accounts have been providing safety and liquidity but, in today’s historically low interest rate environment, very little in returns. One conservative option that has traditionally offered higher interest rates than bank accounts has been fixed annuities. Some fixed annuities are currently paying 2.25% for three years. This is substantially more interest you can get in today from traditional bank products. However, the tradeoff is a three-year commitment; all is not lost for those who are afraid of commitment. We have recently been using no load modified endowment contracts (MEC) as an alternative to cash. MECs grow tax deferred like fixed annuities. However, unlike fixed annuities which have a taxable death benefit, modified endowment contracts have a taxfree death benefit. Therefore, even though some of these contracts are fully liquid and have no penalty for early withdrawal, contract owners have a tax incentive not to cash out their accounts and, therefore, the insurance company is assuming much of the deposits will wind up remaining with the company for longer durations. Subsequently, they are able to invest in longer term instruments that pay more interest than they would be able to on shorter-term annuity contracts. Currently we are seeing some insurance companies offer 3.5% fixed accounts to contract owners. Because MECs also provide an additional tax-free death benefit more than the account value, there is an insurance cost that will reduce the interest paid to the account owner. Depending on the age of the insured, the insurance costs are typically between 1% to 1.5% per year. Therefore, the net returns are 2% to 2.5% without any lockup periods. If you are just looking to increase the interest you are earning on your safe money until interest rates rise at the bank or you are simply waiting for an interesting investment opportunity to present itself, a properly designed MEC can provide safety, liquidity, and an attractive interest rate.

Singer Wealth Keith Singer, JD CFPTM Keith Singer Singer Wealth 2 Locations: 1515 S. Federal Highway, #211, Boca Raton, FL 33432 20900 NE 30th Avenue, Suite 600, Aventura, FL 33180