There are subtle but significant differences between individual retirement plans offered by banks and savings and loans and those available from insurance companies.
The most important difference, according to those who promote the insurance company plans, is that an insurance company will guarantee its interest rates for a longer period of time.
"A bank often doesn't issue an actual certificate," explained Stanley Clarke, of stanley E. Clarke and Associates, a Washington pension consulting firm. "If you look at the small print, you will find that some of the bank plans set your interest rate at whatever the present passbook savings rate is. An insurance company can and will guarantee an interest rate for a long time. I know of one insurance firm that will even guarantee 8.25 per cent for four years."
Still, Clarke said he rarely recommends the use of an insurance company IRA or Keogh plan that involves a life insurance policy. "The portion paid for the insurance plan is not tax deductible," he pointed out.
But if you are not going for the life insurance aspect of the plan, the insurance company version of the individual retirment plan does offer other advantages. Clarke recommends that anyone interested in such a plan should consult with a "fairly sophistocated insurance man, because most life insurance agents are trained to sell life insurance, and are not versed in the various alternatives offered by their companies."
A major benefit of an insurance plan occurs when the time comes to collect.
Insurance firms can offer a wider range of payback alternatives. The most important of these is a lifetime annuity payback plan that banks cannot offer.
"There are any number of alternatives," Clarke says. "Going from installment payments to lifetime annuities that include both the lifetime of both the IRA account holder and his or her spouse. In effect, according to the IRS, the two-lifetime alternative is the most attractive one, since it spreads the payments out over what is potentially the longest period of time.
Clarke added that many insurance firms do not charge fees for setting up IRA plans. Of the ones that do, the charge can range from $15 a year and up, depending on the amount of work involved.
There are also certain tax advantages in the insurance company plans, according to industry representatives.
Under the provisions of the Tax Reform Act of 1976, properly qualified annuity or installment payments made to the beneficiary of a decedent who held an IRA are excludable from the decedent's taxable estate.
A lesser advantage of an insurance plan is the scope of the company itself. Most large insurance companies are national in scope and have agents or representatives in every area. But banks and S&Ls generally are restricted by law to one state or county.
With people moving around as much as they do today, there is an attraction to maintaining your account with the same firm. In the case of bank plans if a consumer decides to switch his or her account to a bank in the town he or she moves to, there may be an interest penalty.
By and large, insurance company plans are not significantly different than bank plans. In both cases, the Keogh plans permit a higher imput of fund's up to $7,500 a year compared with the IRA limit of $1,500 but the Keogh plan, like the IRA, still restricts the contributor to a maximum of 15 per cent of his or her income.
And while the insurance iRA is not available to anyone covered by any other retirement plan, the insurance Keogh is, as long as the consumer is paying for it from income gained by additional self-employment.
For example, a reporter for The Washington Post may make an additional $20,000 a year as a freelance writer. The reporter could set up Keogh plan based on the income outside of The Post earnings. Under the 15 per cent rule, the maximum contribution annually would be $3,000.