Have you ever heard the phrase to “park money”?
Money that is “parked” (as a car might be), is temporarily not being used. People don’t necessarily want their money stagnant–because its value may degrade due to inflation–but they don’t want the risk of investing it either. They don’t need to use it, so they “park” it.
That’s basically what happens when people buy a certificate of deposit (or a “CD”) from a bank or credit union.
What is a certificate of deposit (a “CD”)?
- A CD is a type of time deposit offered by a bank, credit union, or online bank.
- It provides a fixed rate of return (a fixed interest rate).
- A CD may be purchased with a variety of time durations from a few weeks to many years. When the CD matures (at the maturity date), funds may be taken and used for any purpose or may be rolled into another CD.
- The CD comes with a large degree of safety because CDs are FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Administration) insured.
- Generally, CD funds are locked up, not liquid (unless you want to incur a penalty for early withdrawal), for the duration of the CD. That’s the achilles heel of the CD: its lack of liquidity. Your money might be “parked” but it’s parked with a boot on it–you can’t move it.
What’s not popularly known, however, is that when “parking your money” you have more options than a CD.
Banks and credit unions, long considered for their safety, may be susceptible to “bank runs”. Many financial consumers are asking about alternatives to “park” money that is not needed immediately with relatively little risk. Life insurance companies and money market accounts are a viable option to consider.
There’s a reason many of the life insurance companies you recognize have been around for 100 years or more. Life insurance companies maintain long term financial commitments (and demands on their cash) so they are able to sail through short term financial disturbances (recessions, market crashes, etc.) and are generally not susceptible to “bank runs” because of the long term design of their financial commitments.
Life insurance companies offer annuities. Annuities offer the comparable (or higher) rates than CDs, more flexibility, and similar low risk. Annuities are purchased through a financial professional, who may also work at a bank or credit union.
The Case for Annuities
When one shops for a CD, there are generally two features; time and rate.
Annuities also offer time and rate features, too, plus other features:
- More liquidity – offers partial or full liquidity (at varying cost)
- Higher rates – annuities generally offer rates at least as competitive as CDs
- Low risk – You can buy an annuity with varying upside and downside features if you seek more than a fixed rate.
A Variety of Annuities
Annuities now come in many varieties. There are annuities that resemble CDs, focusing on rate, time, and low-risk. But there are now other varieties of annuities that offer ways to participate in market upside growth with downside market protection and other features not available in a CD. Different annuities allow you to dial the upside and downside features to suit your preferences. Annuities are offered through insurance agents or financial advisors.
Money Market Funds
Money market funds are a generally highly liquid option that offer a viable alternative to keeping cash in a bank account. The short duration of the securities held in a money market account keep the valuation closely “marked-to-market”. Money markets are securities offered through a financial advisor.
Time May Dictate Your Product Preference
Generally, if you’re “parking your money” for less than a year, you may find more flexibility with CDs or money market funds because they are offered in many durations of less than one year. Annuities are insurance contracts and may be better suited for 1-year or multiyear commitments.
- Annuities may offer more options than CDs to “park” your money
- Annuities (offered by life insurance companies) provide a similarly low level of risk with more flexibility and generally higher rates than CDs.
- CDs are offered by banks, credit unions, and online banks.
- Money market accounts offer highly liquid, updated valuations, and relative low risk.
Annuity guarantees are subject to the claims-paying ability of the insurance company. Surrender charges may apply if money is withdrawn before the end of the contract. All withdrawals of tax-deferred earnings are subject to current income tax, and, if made prior to age 59½, may also be subject to a 10% federal income tax penalty. Annuities generally contain fees and charges which include, but are not limited to, sales and surrender charges. Additionally, if purchased within a qualified plan, an annuity will provide no further tax deferral features. The contract, when redeemed, may be worth more or less than the total amount invested.