What Is a Guaranteed Investment Contract (GIC)?
A guaranteed investment contract (GIC) is a contract between an insurance company and an investor, typically a pension fund or an employer-sponsored retirement plan, such as a 401(k). The investor agrees to deposit a sum of money with the insurer for a specified period of time, and the insurer promises to pay the investor an agreed-upon interest rate, as well as to return its principal. Employees who participate in a 401(k) or similar plan often have GICs as one of their investment choices. GICs are sometimes called funding agreements.
Key Takeaways
- A guaranteed investment contract (GIC) is an agreement between an investor and an insurance company, typically used in retirement plans.
- The insurer guarantees the investor a certain rate of return in exchange for holding the deposit for a specified period.
- GICs typically appeal to investors who are either risk-averse or looking for a conservative investment to balance out the more volatile portion of their portfolio.
- GICs pay a relatively low rate of interest, putting them at risk of inflation.
How Guaranteed Investment Contracts Work
A GIC works something like a certificate of deposit (CD) from a bank, although GICs are typically purchased by institutions rather than individuals and often come in much higher denominations. Like CDs, GICs are considered a relatively low-risk investment. They also provide a lower rate of return than many other investments.
In retirement plans, GICs typically appeal to risk-averse investors or those who want to balance out their portfolios by putting some of their money into a low-risk account. GICs are often offered to retirement plan participants as part of a stable value fund or similarly named conservative investment option.
Most GICs have either a fixed interest rate or a variable interest rate that adjusts periodically based on a particular index.
What Does "Guaranteed" Mean With a GIC?
The word "guaranteed" in the term guaranteed investment contract can be misleading. While the insurance company guarantees that it will pay the agreed-upon interest rate and return the investor's principal, that guarantee is only as solid as the insurer itself.
When the federal government bailed out the huge insurance company AIG during the 2007-2008 financial crisis, one reason, it said, was to keep AIG from defaulting on its GICs. As officials of the Federal Reserve Bank of New York later testified, "Pension plans that had placed funds in AIG guaranteed investment contracts, or GICs, which function much like deposits in a bank, would have experienced significant losses, losses that would be passed along to retirees or to others whose aspirations to be retirees would surely have been changed."
GIC investors also face interest rate risk. Since GICs pay relatively low rates of interest, it can be easy for inflation to outstrip their performance. As an example, if a GIC pays 4% annual interest over its 10-year term, but inflation averages 6% during that same period, the purchaser will lose money in terms of purchasing power.
What Is a Synthetic Guaranteed Investment Contract (GIC)?
The Office of the Controller of the Currency defines a synthetic guaranteed investment contract as "a diversified portfolio of fixed-income securities that are insulated from interest rate volatility by contracts (wraps) from banks and insurance companies. In this arrangement, the 401(k) plan and its participants own the underlying invested assets (the portfolio of fixed-income securities that supports the stable value fund.)" With a regular GIC, by contrast, the insurance company owns the underlying assets as part of its general account.
What Is a Guaranteed Investment Certificate?
Not to be confused with a guaranteed investment contract, with which it shares the acronym GIC, a guaranteed investment certificate is a financial product in Canada. Guaranteed investment certificates are sold by Canadian banks, credit unions, and trust companies, often to individuals for their retirement accounts. The Canadian GIC is more like a U.S. CD than a U.S. GIC.
Are Guaranteed Investment Contracts Federally Insured?
The Bottom Line
Guaranteed investment contracts (GICs) are contracts between an insurance company and an investor, typically a pension fund or an employer-sponsored retirement plan, such as a 401(k). Employees who participate in a 401(k) or similar plan often have GICs as one of their investment choices, sometimes as part of a stable value fund. Because of their low interest rates, GICs are especially susceptible to the risk of inflation.
FAQs
A guaranteed investment contract (GIC) is an agreement between an investor and an insurance company, typically used in retirement plans. The insurer guarantees the investor a certain rate of return in exchange for holding the deposit for a specified period.
What is a GIC and how does it work? ›
Guaranteed Investment Certificates (GICs) and term deposits are secured investments. This means that you get back the amount you invest at the end of your term. The key difference between a GIC and a term deposit is the length of the term. Term deposits generally have shorter terms than GICs.
How does GIC interest work? ›
On GICs with terms of one year or longer, interest is calculated daily on the principal amount and can either be paid monthly, annually, or compounded annually and paid at maturity. On GIC terms of less than one year, interest is calculated daily on the principal amount and is paid at maturity.
What is guaranteed in a GIC? ›
A guaranteed investment certificate (GIC) is a secure, low-risk investment that guarantees 100% of your original principal while earning annual interest at a fixed or variable rate based on a specific formula.
What are the pros and cons of a GIC? ›
Overall, GICs are safe, reliable investments, but that doesn't necessarily outweigh the cons. On the contrary, GICs have low returns which often fail to keep up with inflation. Ready to learn more?
What is the downside of a GIC? ›
Disadvantages of GICs
Not all investment returns are taxed equally, and unlike capital gains and dividends, interest income earned from GICs is fully taxable in the year received. GICs typically offer very low returns, especially after accounting for taxes and inflation, which can erode your purchasing power.
What are the disadvantages of buying a GIC? ›
The biggest risk you may face with GICs is the potential for capital erosion, or the potential for your GIC's interest rate to lag behind the current rate of inflation. For example – let's say you invested $10,000 in a 1-year GIC, with an interest rate of 2%, but the inflation rate was 3% over the same term.
Are GICs a good investment right now? ›
GIC investment strategies
However, GICs can be a great option for your portfolio, even if you also choose more high-risk or growth-oriented investments since they add stability. And, since interest rates have been on the rise in 2022, GICs have the potential to earn more now than in years past.
Is it smart to invest in a GIC? ›
GICs are low risk, but they're thought as low reward too. The interest earned is typically not greater than the rate of inflation. That said, if you're looking to park some money, they're better than most chequing or savings accounts.
Do you pay tax on GIC interest? ›
Since GIC earnings are considered “interest,” they're taxed at your marginal tax rate—the rate at which your last dollar earned is taxed. Unlike capital gains or dividend income from stocks, the government does not provide tax breaks for interest income.
When a GIC is purchased, the amount invested typically cannot be accessed until the end of the GIC term, for example 1, 3, or 5 years. The end of this term is known as the GIC maturity date. Upon this date, the GIC matures and the amount invested, including interest, is returned to the investor.
What is the maximum amount you can put in a GIC? ›
There is no maximum limit to the amount you may invest in a GIC. Most GICs pay a fixed rate of interest for a set term, such as six months, one year, two years or up to 10 years.
What happens to GICs when someone dies? ›
It is your intention that, upon your death, the joint GIC or Term Deposit automatically becomes the property of the surviving joint holders of the GIC or Term Deposit. You also know that a joint GIC or Term Deposit does not have a right of survivorship when one of the joint holders has a primary address in Quebec.
What is a better investment than GIC? ›
For most investors, bonds ETFs and funds offer several advantages over GICs. We find four main advantages to choosing bond ETFs and funds over GICs including better portfolio return expectations, enhanced portfolio diversification, a more positive long-term outlook and greater liquidity.
Who pays the highest interest on GIC? ›
Highest GIC rates currently available
- 1-year GIC: 5.60% (LBCDigital and Motive Financial)
- 2-year GIC: 5.65% (LBCDigital, Laurentian Bank of Canada and Motive Financial)
- 3-year GIC: 5.35% (Motive Financial, EQ Bank and Oaken Financial)
- 4-year GIC: 5.10% (LBCDigital and Motive Financial)
With a GIC, you're guaranteed to see returns and won't have to worry about the risks of cashing out your investments too early or at the “wrong time” when the market is down. You may have a short-term investment horizon if you're: Saving for a down payment and plan on buying a home within the next five years or less.
Can you take money out of a GIC at any time? ›
If you have a redeemable GIC, you can cash in your investment before maturity, subject to certain conditions. If you have a non-redeemable GIC, you'll have to wait until the investment matures.
Are GICs a good investment? ›
They're considered one of the safest investment options for Canadians because returns are guaranteed, so there is minimal risk involved. A GIC works similarly to a high-interest savings account, except that your money is locked in to grow for a predetermined period of time.
How much interest does a GIC pay? ›
Best Fixed-rate, non-redeemable GICs
| 1-year Term | 5.05% |
| 2-year Term | 5.20% |
| 4-year Term | 4.75% |
| 3-year Term | 5.35% |
| Financial Institution | Oaken Financial |
1 more rowRefund Process
Ensure that you fill in the request completely in order to avoid any delays. Once we have approved your request, you will receive the refund within 8 weeks. For security reasons, the refund may only be returned to the account where funds were initially received from.
