Skip to content
SuperMoney logo
SuperMoney logo

Guaranteed Investment Contract: Secure Investments for a Stable Retirement

Last updated 04/16/2024 by

Alessandra Nicole

Edited by

Fact checked by

Summary:
Guaranteed Investment Contracts (GICs): Secure investments for retirement plans

Get Competing Personal Loan Offers In Minutes

Compare rates from multiple vetted lenders. Discover your lowest eligible rate.
Get Personalized Rates
It's quick, free and won’t hurt your credit score

Unlocking the world of guaranteed investment contracts (GICs)

Guaranteed investment contracts (GICs) are a vital component of retirement planning, providing a secure and conservative avenue for investors. In this comprehensive guide, we’ll delve into every aspect of GICs, shedding light on what they are, how they work, their pros and cons, and more.

What are guaranteed investment contracts (GICs)?

A guaranteed investment contract (GIC) is a financial agreement between an investor and an insurance company, frequently utilized within retirement plans like 401(k)s. These contracts offer a straightforward proposition: the investor deposits a specified sum with the insurer for an agreed-upon period, and in return, the insurer guarantees an interest rate and the return of the principal amount.

Understanding how guaranteed investment contracts work

Imagine a GIC as akin to a traditional certificate of deposit (CD), but tailored primarily for institutional investors. GICs are synonymous with low risk, offering a haven for funds seeking stable, albeit conservative, growth.
Within retirement plans, GICs are often bundled into stable value funds or similar conservative investment options. Their appeal lies in providing investors with a stable anchor to offset riskier segments of their portfolios.
GICs typically feature either fixed or variable interest rates. The former maintains a constant rate throughout the investment period, while the latter adjusts periodically based on specific market indices. The choice between the two depends on the investor’s risk tolerance and market expectations.

Demystifying the ‘guaranteed’ aspect of GICs

While GICs are promoted as “guaranteed” investment contracts, this guarantee is only as robust as the financial stability of the insurer. The 2007–2008 financial crisis exemplified this vulnerability when the U.S. government intervened to prevent defaults on GICs held by insurance behemoth AIG.
Investors in GICs also face interest rate risk. Given their tendency to offer lower interest rates, GICs can easily succumb to inflation. For example, if a GIC pays an annual interest rate of 4% over a ten-year term but inflation averages 6% during that period, the investor experiences a real loss in purchasing power.

Synthetic guaranteed investment contracts (GICs): a different perspective

A synthetic guaranteed investment contract (synthetic GIC) deviates from the traditional GIC model. In this setup, a diversified portfolio of fixed-income securities is shielded from interest rate fluctuations by contracts, often referred to as wraps, provided by banks and insurance companies. Unlike conventional GICs, where the insurance company owns the underlying assets, participants in a synthetic GIC own the underlying invested assets supporting the stable value fund.

Understanding Canadian guaranteed investment certificates (GICs)

It’s essential to distinguish between guaranteed investment contracts (GICs) and guaranteed investment certificates (GICs) in Canada. The latter is a financial product prevalent in Canada, offered by banks, credit unions, and trust companies. These certificates are frequently chosen by individual investors for their retirement accounts and share more similarities with U.S. certificates of deposit (CDs) than U.S. GICs.

Are guaranteed investment contracts federally insured?

Unlike certificates of deposit (CDs) in the United States, which often enjoy insurance coverage from the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration (NCUA), GICs lack federal insurance protection. Some insurance products find shelter under state insurance guaranty associations. However, it’s important to note that many of these associations do not extend their coverage to include GICs.

Pros and cons of guaranteed investment contracts (GICs)

Weigh the risks and benefits
Here is a list of the benefits and drawbacks to consider:

Pros

  • Security: GICs provide a secure investment option, making them suitable for risk-averse investors.
  • Stability: They offer stability and are often used to balance out more volatile investments within a portfolio.
  • Principal protection: The principal amount is guaranteed, ensuring the return of the initial investment.

Cons

    • Lower returns: GICs typically yield lower returns compared to riskier investments, potentially lagging behind inflation.
    • Dependent on the insurer: The guarantee’s strength relies on the financial health of the insurer, posing risks if the insurer faces financial difficulties.
    • Inflation sensitivity: GICs can lose purchasing power when inflation rates exceed their interest rates.

Conclusion

In conclusion, guaranteed investment contracts (GICs) stand as reliable pillars within retirement planning. Offering security and stability, they cater to risk-averse investors while demanding careful consideration of the insurer’s financial health. GICs may not deliver high returns, but they serve as a vital asset to manage risk and secure a portion of one’s financial future.

Frequently asked questions

Are GICs suitable for all investors?

GICs are primarily designed for risk-averse investors or those seeking a stable and conservative investment option. However, they may not be suitable for investors with a higher risk tolerance who seek potentially higher returns.

How can I assess the financial stability of the insurer offering a GIC?

To evaluate the financial stability of an insurer, you can review their credit ratings provided by reputable rating agencies. Additionally, researching the insurer’s financial statements and performance history can offer valuable insights.

Is there a minimum investment amount for GICs?

The minimum investment amount for GICs can vary depending on the insurer and the specific terms of the contract. It’s essential to inquire with the insurer or financial institution offering the GIC for their requirements.

Can GICs be part of a diversified investment portfolio?

Yes, GICs can be a component of a diversified portfolio, especially for investors looking to balance risk. However, they are unlikely to provide the same level of growth potential as riskier investments like stocks or real estate.

What should investors consider before investing in GICs?

Before investing in GICs, investors should assess their risk tolerance, investment goals, and the need for liquidity. It’s also crucial to conduct due diligence on the insurer and thoroughly understand the terms of the GIC contract.

Key takeaways

  • GICs provide security and stability, making them an excellent choice for risk-averse investors and portfolio diversification.
  • The strength of the “guaranteed” label in GICs depends on the insurer’s financial stability, necessitating thorough due diligence.
  • Low-interest rates on GICs expose investors to the risk of inflation eroding their purchasing power.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

Loading results ...

Share this post:

You might also like