Guaranteed Investment Funds (GIC’s) are low risk investments. Returns and term are known at time off purchase. Both the initial deposit (principle) and return are guaranteed, both by the company offering the GIC with a further guarantee from the Canada Deposit Insurance Corporation (CDIC)
Returns are typically less than what you’d expect with other investment products, but that is the trade of for the guaranteed nature of GIC’s. GIC’s are typically offered by Banks and Trust companies and they vary in term length typically from 1-5 years. GIC’s can be used in an RRSP or a TFSA. Most GIC contracts offer the ability to be cashed if needed during the term, but there is usually a penalty for doing this.
GIC’s are typically ideal for:
- Clients who do not want market risk in their portfolio
- Clients in or approaching retirement (who no longer desire risk in their portfolio (or part of their portfolio))
- Persons who depend on investments for income and need guaranteed income.
- Very low-risk
- Returns are known in advance
- Principle and interest are fully guaranteed by bank, trust company or credit union that issues GIC
- Further protected by Canada Deposit Insurance Corporation (CDIC) (for Banks) or the provincial equivalent for credit unions, up to $100,000 per company per account should the issuing bank, trust company or credit union default on their guarantee.
- Interest is fully taxable (if not within an RRSP or TFSA)
- Returns are typically lower than other investment options
- Subject to probate upon death
- No beneficiary designation (will be taxed within an estate upon death)
Life Insurance Company GIC’s
Life Insurance GIC’s have some unique advantages, including more favourable tax status particularly at time of death as well as the ability to lock in a rate for longer period of time.
Life Insurance companies also offer guaranteed investment contracts very similar to conventional GIC’s. The benefit of getting a GIC from a life insurance company is that you can designate a beneficiary. Should you pass away, proceeds will be paid directly to your beneficiary avoiding being probated within your estate. Payments from a Life Insurance GIC product may also have beneficial tax treatment and protection from your creditors depending on your situation. Life Insurance GIC’s typically have a slightly lower return on similar term options as compared to Banks, Trust or Credit Union GIC’s, however, Life Insurance Companies offer considerably longer term contracts typically ranging from 5-30 years.
Additional Pros (compared to GICs):
- Ability to by-pass probate
- Preferential tax treatment (in some circumstances)
- Protection from creditors (in some circumstances)
- Very long term options available (5-30 years)
Additional Cons (compared to GICs):
- Slightly lower returns than conventional GIC’s (on similar length terms)