With the recent market volatility, interest rate hikes, and recession worries, principal-protected investments such as GICs have started to gain the attention of risk-averse investors. Guaranteed Investment Certificate (GIC) rates have recently come back up after historic lows. Although we are far from the 8-12% rates that some clients still reminisce about from decades past, GICs could still be a suitable investment depending on your risk tolerance and circumstances. In Canada, deposits with financial institutions are protected by the Canadian Deposit Insurance Corporation (CDIC). The CDIC is an independent crown corporation established by the Canadian government to insure bank deposits of up to $100,000 per insured category held at a CDIC member bank. The insured categories include but are not limited to individual cash accounts, joint accounts, RRSPs, RRIFs, TFSAs, and trust accounts.
It may be a good time to review your portfolio and think about ways to increase your CDIC coverage if you have GIC deposits. Maximizing your coverage is a risk management goal that can help protect your capital and provide you peace of mind. There tends to be two popular solutions for increasing CDIC coverage as detailed below.
Option 1: Diversifying into different financial institutions
Investors who have built up significant savings sometimes open accounts at different retail banks to increase the amount of CDIC coverage since each member bank provides $100,000 of coverage. The downside of this strategy is that it may be time-consuming to open and manage multiple accounts at multiple institutions while searching for the highest rates. Alternatively, these investors can consider taking advantage of a one-stop shop by building a GIC portfolio with an investment brokerage firm.
- Access to daily GICs offerings by different CDIC member firms covered by the brokerage firm right at your fingertips.
- Consolidate multiple GIC investments in one account with different member firms, with each position carrying the $100,000 CDIC insurance (per GIC issuer).
- Increase the average yield of the GIC portfolio through a laddering strategy (staggered maturity dates).
Option 2: Transferring the deposits to other accounts
The CDIC provides separate coverage for deposits held in each eligible account category. Therefore, some may split their investment funds amongst the eligible category accounts to multiply the insurance coverage. One of the most popular ways for an investor to increase CDIC coverage is to open a single name account and a joint name account.
- The CDIC provides separate coverage for deposits held in one name and deposits held in more than one name (for example, a joint account)
- Both single name accounts and joint name accounts can enjoy the benefits of Option 1.
The CDIC coverage serves as an insurance policy that protects your savings and some types of investments in the event the bank holding your savings goes out of business. While the likelihood of a Canadian financial institution in default is low, CDIC coverage protects your money and comes at no additional cost. You should consider the benefit and aim to maximize it.
This information is provided for general guidance and should be used only in conjunction with a discussion with your Investment Advisor. This will ensure that your own circumstances have been considered properly and that any action is taken based upon the latest available information.