The interest on bank deposits in America is regularly decreasing following the decrease in the key rate of the Central Bank. Now it is more profitable for commercial banks to borrow money from the Central Bank at 4.5% per annum than to accept deposits from the population at a rate of 7%. As a result, the profitability of deposits in the last 1.5-2 years has decreased by approximately 30%.
However, studying the offers of banks on deposits, you can still find deposits with an attractive rate of 7%. But almost all of them have the postscript “investment”, “with accumulative life insurance”, etc.
In this article, we’ll cover:
- what are the features of investment deposits;
- what are their pros and cons;
- why banks are promoting such products;
- whether clients should invest in them.
Features of investment deposits
The main characteristic of such combined products is that the funds deposited by the client in the bank are divided into 2 parts. The first part is placed on a regular deposit . For the use of money, a financial institution charges a person with interest. The rate on such combined deposits is even higher than on ordinary ones.
The client transfers the second part of the money to the financial institution in trust management. It cannot be lower than a certain amount (in dollars or as a percentage of the open deposit). The bank employees will use these funds to purchase valuable assets on the stock exchange.
It is assumed that the investor’s income from investments will be even higher than the interest on the deposit. However , of course, no one can know for sure . Much depends on what kind of tools the bank employees select, and how actively the world economy will develop (or fall).
Naturally, the bank will not be free to manage the client’s money. The investor will have to pay him a commission using TD Bank Routing Number. Moreover, in most cases, the size of this commission is fixed. Whether the investment is successful or not will not matter.
The money deposited in the investment accounts of banks has one more important feature. The fact is that the funds put on time deposits are insured by the state in case of bankruptcy of a financial institution. If the Central Bank revokes the license from the credit institution, the Deposit Insurance Agency will return the clients of the bankrupt bank their deposits (albeit no more than 1,400 thousand dollars each).
But the funds placed on investment accounts are not insured by the state . In case of bankruptcy of the bank it will be almost impossible to get them back.
Analysis of the conditions of an investment deposit using a specific example
To make the theoretical calculations more understandable, we will give a real example of a combined contribution. As an illustration, let us take the product of On the Top with accumulative investment insurance.
According to the terms of this deposit, the bank’s client can place savings on a term deposit at a rather attractive rate of 7.5% per annum . But at the same time, he must conclude an endowment life insurance agreement with one of the bank’s partners.
The minimum amount that a person can place on a term deposit at an increased rate is 50 thousand dollars. The contract is concluded for 181 or 367 days. The deposit does not provide for the possibility of replenishing the deposit, partial withdrawal of money, prolongation of the agreement, capitalization of interest. Interest for using money is charged at the end of the deposit term.
If a person places a minimum amount of 50,000 dollars on the deposit, then in a year he will receive a profit of 3,770 dollars.
What is endowment life insurance? The client will have to conclude a contract of the NSJ with the insurance company for 5 years . Moreover, every year he will have to make a contribution equal to the initial one (the minimum amount is 50,000 dollars). Thus, in 5 years, at least 250 thousand dollars will accumulate on his account.
The insurance company will place the funds received in valuable assets. It is assumed that the investor-investor will receive additional profit from the investment in 5 years . It is possible that this profit will be even higher than the percentage of the deposit. However, when concluding an agreement, the bank cautiously notes that in this case, “income is not guaranteed .”
Another attractive feature of the NSJ is that the life of the depositor is insured during the term of the contract . In the event of the death of the client of the insurance company, his relatives will receive the entire investment amount in their hands. If the depositor dies as a result of an accident, the insurance company will reimburse his relatives in double the amount, and if as a result of an accident – three times. If a person who has entered into an NSJ contract happily survives until the end of its validity, he will receive the entire accumulated amount in his hands, along with interest on investments.
Will a person who has invested money in accumulative life insurance have some kind of guaranteed income? If he concludes an agreement for at least 5 years, then subsequently the state will return the personal income tax to the depositor in the amount of 13% of the accumulated amount .
For example: with a minimum annual contribution to the housing maintenance service of 50 thousand dollars for 5 years a person will save 250,000 dollars. In this case, the state will reimburse him personal income tax in the amount of 32,500 dollars. Naturally, the client of the insurance company must be a payer of personal income tax (be officially employed).
“Pros” and “cons” of investment deposits
So, let’s highlight the positive aspects that such combined products contain.
Banks accept money for such deposits at an increased rate , which is rare in our time.
It is likely that the funds that a person directs for investment will bring him even more profit than the interest on the deposit. Typically, the return on investments in securities over a 5-year horizon is 10-15% per annum.
If the client’s additional funds are invested in the NHS, then he receives a life insurance service .
However, investment deposits also have disadvantages . When buying combined products, part of the funds will have to be directed to other purposes . And when concluding an agreement, the NSJ will need to make contributions over the next several years.
Investment income cannot be calculated in advance. Moreover, it is not even guaranteed .
Bank specialists will take a commission from the client for money management . The state will have to pay tax on the profit earned from investments .
The money deposited in the bank’s investment account is not insured . In the event of the bankruptcy of a financial institution, it will be almost impossible to get them back.
Who are investment deposits suitable for?
If a person just wants to place his savings on a deposit in order to end up with a fixed income, then such a combined product is unlikely to suit him. Part of the funds will need to be directed to the purchase of securities. Bank employees cannot guarantee the return on investments, but they will still take a commission for money management. Funds transferred to a financial institution for investment purposes are not insured by the state.
Conservative supporters of guaranteed income are more suitable for regular deposits with a low interest rate.
Who should take a closer look at investment deposits? First of all – to those people who are interested in obtaining increased profits from working on the stock exchange, but have no investment experience . When concluding such an agreement with the bank, specialists will take care of the client’s money management. This will reduce the risk of financial losses from unsuccessful investments. When concluding an NSW contract, a person will receive an additional service – life insurance . For several years, he will be able to accumulate the amount necessary, say, for a large purchase. An additional pleasant bonus for the depositor will be an increased interest on the deposit.