TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/061989/06198900.015

Text File | 1990-09-22 | 4KB | 72 lines

BUSINESS, Page 45

Money Angles

Membership Has Its Follies

By Andrew Tobias


    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.