In the wake of the Netspend’s restrictions on savings accounts, I thought it would be interesting to explore some other “alternative” savings options. This post is about a guaranteed 4% savings option available only if you purchase a life insurance policy.
Availability: All US states except Alaska, Maine, Montana, and Virginia; not available in the District of Columbia or Puerto Rico
Insurance: Not federally insured, but it is backed by The Prudential Insurance Company of America
Membership: Must be a member of AICPA (American Institute of CPAs) or a State Society of CPAs. Requirements and costs of state societies depends on the state in which you live, but membership in AICPA will usually cost at least $255 per year.
The Life Insurance Policy
This is a universal life insurance policy that provides coverage up to 100 years of age for up to $2.5 million. The rate really will depend upon your particular life situation, so I won’t focus too much on this. However, in general, the policy seems fairly competitive and reasonable if you’re already looking for life insurance.
4% Fixed Account
I called this a “savings” account even though it’s not. It’s a fixed rate account guaranteed to always provide at least 4% interest so long as the backing company, Prudential, is able to pay. This does mean if Prudential were to fail, you may not be able to recover your funds. With that said, Prudential is a large and well-established company.
Funds are taxed when you make a withdrawal, not as they grow. However, there is a fee for every withdrawal – either $10 or 2% of the amount draw, whichever is less, limited to $20 max. This is manageable if you withdraw in large enough amounts/limit how often you withdraw.
A significant drawback is that because the fixed account is tied to the overall life insurance, you’re limited in how much you can invest into it without also increasing the cost of the life insurance policy. That may actually be a good thing if you want the life insurance policy, though.
I see this definitely working for a CPA looking for a life insurance plan. I can even see this working for a non-CPA looking for life insurance. The annual membership fee would be a barrier, but it could easily be justified by putting enough money into the fixed account.
However, I just don’t see this as being valuable for most people who aren’t already in the life insurance market. The combination of contribution limitations as well as costs makes this a much less attractive option than alternatives.