Money Angles: Membership Has Its Follies

I’ve had my gold card for 21 years now, and am thus something of a student of American Express. I watched in amazement as it introduced flight insurance, in admiration as it goosed charge volume by offering to donate money to the Statue of Liberty, in wonder as it offered the platinum card (twice to a friend who was at the same time being dunned for late payments on his green card), and in awe as it offered baggage insurance against the possibility that your tennis racket would wind up in Acapulco more than six hours after you did. (A mere $4.75 a ticket buys you as much as $200 in protection against disasters such as this.)

The $1 million flight insurance at $13 a ticket works out to about a dime in expected payouts for every dollar in premiums, leaving Amex 90 cents to cover expenses and profit. The Statue of Liberty stood to gain a penny every time you charged an $80 dinner or a $400 airline ticket to your card, leaving Amex 319 pennies in the case of the dinner (at its service charge of about 4% for restaurants) or 999 pennies in the case of the ticket (at its 2 1/2% or so on airline fares). The premium you paid for the platinum card, which has an annual fee of $300 a year vs. $75 for the gold card, primarily bought you prestige, the cost of which to Amex is nil. And the baggage insurance — well, it would be hard to make a case that this is the kind of insurance protection that privileged Americans should not leave home without, but the offer, as always, was compelling. These guys really know how to write a letter.

The fact is it’s hard to open mail from American Express Travel Related Services division with anything but keen interest, if only to try to figure out what’s travel related about some of its offerings: a grandfather clock, a 40-in. TV or the offer in my mail today: a tax-deferred annuity.

Annuities are like nondeductible IRAs, only without the $2,000 annual limit. With this one, Amex was offering to charge my card anywhere from $50 to $3,000 a month, at my option, and to pay me interest on my monthly contributions at a 12% “introductory rate” through June of next year. Thereafter the rate would be “set above a nationally recognized interest index plus 1.5%.” I was all set to sign up, when I noticed:

— The 12% come-on is trivial over the long pull; it is designed to cloud your judgment. The true rate on this deal is the “nationally recognized interest index plus 1.5%” that Amex talks about. But a footnote reveals this to be an index of short-term, tax-free bonds, the lowest-yielding animals in the zoo (at the end of 1988: 5.83%).

— Once in, you can stop making new contributions — but it’s expensive to get old ones out. So don’t think you’ll just pocket that 12% for a year and then move on to something else. If you withdraw your money, Amex charges a penalty, 7% the first year, which gradually evaporates in seven years. But there’s also the 10% IRS penalty on withdrawals before age 59 1/2 and, whatever your age, the income tax due on the interest your funds have earned.

— Amex shows how $200 a month for 25 years would grow to $183,000, assuming 12% the first year and 8% each subsequent year, vs. just $124,000 outside the shelter of a tax-deferred annuity. But that’s $183,000 before tax vs. $124,000 after tax. And it assumes that the best you could earn on your own is a fully taxable 8% a year.

If the convenience and discipline of having Amex bill you each month is worth giving up the higher return you’d probably get from someone else’s annuity — like Northwestern Mutual Life’s or USAA Life’s, to name just two — then this is the plan for you. Amex has trade-named it Privileged Assets because membership has — oh, you know.