The Security of GICs
Written by Jim Yih •
One of the most attractive features of the GIC is the safety of the capital. The invested capital is safe because the financial institution guarantees it. What happens if the financial institution is no longer around to guarantee your capital?
The basic premise of a GIC is that the investor is actually a lender. He or she lends money to a financial institution in hopes of getting their money back plus an agreed upon amount of interest.
One of the considerations every investor must make is, will the entity that he or she lends money to be able to pay back the capital plus interest? What is the solvency of that institution? Is that institution really secure?
Size and Security
Often, the bigger the financial institution, the more secure we feel about our investment. For example, if we buy a GIC with the Royal Bank, most people will feel pretty secure about putting money with the largest bank in Canada. However, placing money with XYZ Trust Company may leave investors with questions and some insecurity.
One of the ways to feel more secure about your GIC investment is to find out if the financial institution is insured in some way, shape or form. I will walk you through some of the different kinds of insurance in the deposit or GIC industry.
Canada Deposit Insurance Corporation (CDIC).
The Canada Deposit Insurance Corporation (CDIC) is a federal Crown Corporation. It was created in 1967 to provide deposit insurance and contribute to the stability of Canada’s financial system.
CDIC insures eligible deposits up to $100,000 per depositor and reimburses depositors for the amount of their insured deposits when a member bank or trust company fails. As a result, it may be in every investor’s best interest to split a deposit among different financial institutions. For example, let’s say Keri has $270,000 to invest in a GIC. To ensure that she is insured for this money, she may be better off investing $90,000 among three different financial institutions.
To be eligible for insurance, deposits must be in Canadian currency and payable in Canada. Term deposits must be repayable no later than five years from the date of deposit. CDIC covers savings and chequing accounts, term deposits, money orders and drafts, and travelers’ cheques. CDIC does not cover foreign currency, treasury bills or investments in stocks, bonds or mutual funds.
You can increase your insurance coverage if the financial institution has a number of different organizations under the same umbrella. For example, with Scotia Bank you can place deposits with Scotia Bank, Scotia Trust, Scotia Mortgage and Montreal Trust. In essence, an investor would be insured up to $400,000 under the Scotia Bank umbrella if they set up their deposits properly.
For more information, visit www.cdic.ca.
Canada Life and Health Insurance Corporation (CompCorp).
Unlike CDIC, which is a federal government agency, CompCorp is a private corporation funded by the members. With very few exceptions, the federal government requires all life and health insurers become members of CompCorp.
CompCorp provides protection for investors with policies with Canadian life insurance companies. Compcorp not only provides coverage for term deposit products and accumulation vehicles but also for various insurance products like annuities, life insurance, disability, and group benefits.
CompCorp breaks their coverage into three different classes of policies. Class A policies are life insurance and accumulation products. Class B policies are annuity or disability products and Class C policies are for health or group benefit plans.
For accumulation products, CompCorp will also cover up to $60,000 for a non-registered plan, $60,000 for a registered plan and another $60,000 for a group RRSP plan, per individual.
For more detailed coverage, visit www.compcorp.ca.
Credit Union Depositor Protection Programs (CUDPP)
Similar to CDIC and CompCorp, these programs are designed to protect consumers against the failure of credit unions. Each province has separate regulations and rules and limits. Ontario and BC have $100,000 insurance limit. Alberta, Saskatchewan and Manitoba have 100% coverage. The Maritime Provinces are covered up to $60,000.
As you can see, there is lots of protection out there for GIC investors. The rules and coverage can be quirky so make sure you do your homework. Alternatively, you can contact a deposit broker for more information on the security of GIC products. For a list of registered brokers visit the Registered Deposit Brokers Association website (www.rbda.ca).