State Farm Bank® Market Rate Certificate of Deposit
State Farm Bank® Market Rate Certificate of Deposit is a creative saving product: it allows you to participate in some of the gains in the stock market while guaranteeing zero principal loss.
Here is a digest of the Truth-In-Saving disclosure:
- Term is always five years; No early withdrawal allowed except for depositor's death
- Minimal deposit = $500
- Stock market measure is S&P 500 index (exclusive of dividend income)
- Return equals 90% of the average of the 12 pricing dates, including the last exchange business day of the month immediately preceding the Maturity Date, and the last exchange business day of the previous eleven (11) three month periods immediately preceding the Valuation Date.
Below is a hypothetical example assuming $10,000 investment and consistent growth of S&P 500 at an annual rate of 10%:
| Time | S&P 500 | Detailed Calculation | ||
| At Purchase | 1,000 | Start Market Value | 1,000 | |
| Month 3 | 1,024 | Average of 12 Pricing Dates | 1,417 | |
| Month 6 | 1,049 | Difference | 417 | |
| Month 9 | 1,074 | Market Participation Factor | 90% | |
| Month 12 | 1,100 | Market Appreciation Entitled | 376 | |
| Month 15 | 1,127 | As % of Start Market Value | 37.6% | |
| Month 18 | 1,154 | |||
| Month 21 | 1,182 | Original Principal | $10,000 | |
| Month 24 | 1,210 | Interest Earned | $3,757 | |
| Month 27 | 1,239 | Amount Received at Maturity | $13,757 | |
| Month 30 | 1,269 | |||
| Month 33 | 1,300 | Annual Return Rate | 6.6% | |
| Month 36 | 1,331 | |||
| Month 39 | 1,363 | |||
| Month 42 | 1,396 | |||
| Month 45 | 1,430 | Compared to Direct Stock Market Investment | ||
| Month 48 | 1,464 | Market Appreciation | 61.1% | |
| Month 51 | 1,499 | |||
| Month 54 | 1,536 | Real Market Participation Factor | 61.5% | |
| Month 57 | 1,573 | |||
| Month 60 | 1,611 | |||
Some of the results:
- The investment will yield a 37.6% return after five years, or an annual return rate of 6.6%. Amount received at maturity (year 5) will be $13,757.
- The real market participation rate is 61% (37.6%/61.1%).
On the other hand, if in the five years the stock market turns south, you will still keep your original investments. In short, you are giving up 39% of the potential upside for principal protection.
It is hardly to say whether it is a good deal. Of course, State Farm will make money on it, but it does not mean it is necessarily a bad deal for investors. Personally, I feel it can be a good fit to lots of retirees' portfolio.
(This post is part of PFBlog Product Review series. Check out more reviews here.)
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