What Is a Secured Certificate of Deposit?
Certificates of Deposit (CDs) are an attractive alternative to high-risk, high-yield investments because of the security in knowing that they are insured by the Federal Deposit Insurance Corporation (FDIC). But beware---not all CDs are equally protected by the FDIC. Those that are, however, are easy to purchase, readily available at most banking institutions, and you don't have to be a member or have an account to purchase one.
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Certificates of Deposit and FDIC Insurance
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A secure Certificate of Deposit is one that qualifies for FDIC insurance. CDs are included in the FDIC insurance amount that was raised permanently to $250,000 on July 21, 2010. Because terms and conditions vary, the FDIC offers a free Electronic Deposit Insurance Estimator (EDIE) on its website. EDIE considers the combined amounts of checking, savings, money market and certificate accounts you have in a single institution, and calculates whether all your deposits in that institution qualify for FDIC insurance.
Using a Bank or Broker
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FDIC-insured certificates of deposit can be purchased from either a bank or a broker. All CDs sold by FDIC-insured banks qualify for FDIC coverage if the amount calculated by EDIE is under $250,000. The Securities and Exchange Commission (SEC) cautions, however, that deposit brokers are not required to be licensed. Depending on the specific record-keeping procedures of your broker, your CD may not qualify for FDIC insurance. Performing due diligence is your best protection.
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Types of Certificates of Deposit
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Unlike a savings account, a CD purchaser agrees not to withdraw money from the CD for a specified period of time in return for a higher interest rate. According to the SEC, "Investors may now choose among variable rate CDs, long-term CDs, and CDs with other special features." Some CDs even have a "call" feature which enables the bank to terminate the CD term early if interest rates fall. If interest rates rise, however, the investor does not enjoy the same privilege.
Asking the Right Questions
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Both the SEC and FDIC advise examining the terms of a CD before making a purchase. Ask when the CD will mature. Confirm the interest rate and whether it is changeable. Inquire about early withdrawal penalties and "call" features. Verify when and in what manner interest payments will be made. Then, ask if there are any additional features, benefits or penalties that haven't yet been disclosed.
Important Considerations
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Employ a prudent, critical mindset. The FDIC counsels investors to beware of advertisements offering higher than usual interest rates. Identify the issuer if purchasing a CD through a broker and find out whether the broker can, in fact, sell the CD. The most important consideration is whether a particular investment makes sense for you.
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