When an older person purchases a brokered certificateof deposit, the chances are -- depending on his age -- that hewill never live to collect the full principal. If he sells hisinvestment before it has matured, he will suffer a loss regardlessof interest rate fluctuations. If he waits for the certificateto mature, the chances are that he will die before.
"Brokered" certificates of deposit,though insured by the FDIC, lose money for their owners the minutethey are bought. This loss is separate from any gain or loss dueto interest fluctuations. It is a loss that is kept hidden fromthe investor until it is too late. Please see my write-ups:
Brokered CDs: CaveatEmptor
The Behaviorof FDIC-Insured CDs in the Secondary Market
As an example of what can easily happen toan older investor, I have learned from current U.S. Life Tables that I haveno more than a 40% chance of collecting on the "FDIC-insured"principal of the CDs that I was sold at age 76.
Life tables show probabilities that are veryprecise for large populations, but they obviously cannot predictwhen an individual person will die with any degree of certainty.As to that -- the hour of an individual's death -- we know nomore than did Isaac in Genesis 27:2: "I do not know how soonI may die." Nevertheless, death is obviously more probableat certain stages of life than at others. Absent particularlyrelevant information about an individual, such as life-threateningdisease, life tables are very useful, even for individuals, formany decisions that require reasonable estimates of life span.
In the table below, I give the probabilities,for older investors, of living long enough to see a ten-year CDmature. Since different age and sex groups have substantiallydiffering life expectancies, there are separate calculations forthese.
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1) After age sixty, the chances of living whena ten-year CD expires grow rapidly smaller. After about age 75,these chances are less than even. By age 85, they are minuscule.
2) Since these instruments are sold with defectsthat are hidden, defects that can only be cured to some extentby holding them to maturity, it is especially cruel to marketthese certificates to older Americans.
Sendan e-mail to Werner Cohn This e-mail link maynot work for you if you use a web-based e-mail service. If so,please use my direct e-mail address as follows: firstname.lastname@example.org
November 25, 2003
Update, June 2004:
There apparently is a provisionin brokered CDs that in case of death or "adjudicated incompetence,"these instruments can be redeemed at par even before maturity.A registered broker would have to apply for such redemption throughthe Depository Trust Company. The procedure is complex. Moreover,for reasons best known to himself, my broker never informed meof this provision.
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