Insured vs. Non-insured GICs

Planning to invest in a GIC? There are several factors to consider when purchasing a GIC, which includes cashable GIC or redeemable GIC, the length of the term you are comfortable with and the interest rate. A major factor to consider is if the GIC is covered by deposit insurance (whether it is insured or non-insured).

Background of Deposit Insurance

The Canada Deposit Insurance Corporation (CDIC) covers up $100,000 per insured category at CDIC member institutions. If the bank goes under, the CDIC protects both your principal and the interest you accrued.

GICs that are covered

Many GICs at Canadian banks qualify for CDIC insurance. Below is a list of GICs that are eligible for insurance:
  • GICs with an initial term of 5 years or less.
  • Five-year deposits that mature on non-business days
  • Index-linked GICs are covered if the principal is entirely repayable when it matures. The term must also be five years or less.

GICs that are not covered

 Some GICs are not insured by the CDIC. These include the following:
  • GICs denominated in the US or other countries
  • GICs that have a maturity of more than five years
  • GICs issued by a bank that is not part of the CDIC

Protecting your money

CDIC insurance covers various categories, not just GICs. Therefore, it is possible to have more than $100,000 insured at one bank. For example, if you have $75,000 in GIC  in an RRSP, $50,000 in a GIC in a TFSA, $50,000 in a savings account, and $10,000 in a chequing account, then you have $200,000 covered by CDIC insurance. You can also choose to deposit your money in various banks. You might also find that some non-government insurers offer better coverage than the CDIC.

What This Means for You

Before buying a GIC, check with that bank and ask if your money is protected. This can help provide you with peace of mind when it comes to your savings.

Foreign Currency GICs

There are many different types of GICs – long-term, short-term, cashable and non-redeemable. You might even consider purchasing foreign currency GICs. So, what are they and what are the benefits? A GIC purchased in Canada is denominated in Canadian dollars. With foreign currency GICs, the investment is denominated in the currency of the GIC. If you are purchasing a GIC with Canadian dollars, the bank will do an exchange to the US dollar. This can cost you a little because the bank will sell you the money with a markup to the foreign exchange rate. The end of the term for the GIC will give you the principal plus interest in the foreign currency. This could mean you lost money or make money based on the exchange rate.

Benefits of Foreign GICs

One of the biggest benefits of buying a foreign currency GIC is that you protect your money against the fall of the Canadian dollar. For example, if the Canadian dollar value has fallen, you will make money. This will provide you with a capital gain. Also, if you plan to travel to the United States, you won’t have to deal with a weaker dollar when making purchases.

Disadvantages of Foreign GICs

There are some cons to purchasing a foreign currency GIC. For starters, just like making money if the Canadian dollar drops, you can also lose money if the dollar rises. You will also find that interest is very minimal with these GICs. They are also not insured by the CDIC, so the government won’t protect your money if the bank fails.

What affects the Canadian dollar?

If you are thinking about buying a US dollar GIC, you should learn more about the Canadian dollar. The dollar fluctuates based on a few factors:
  • Trends in commodities – As commodities increase the dollar will rise. Oil is a major factor in the commodity prices.
  • Canadian interest rates in relation to the US – Investors often lean toward the currency with the best interest rates. If the US raises rates, and the Bank of Canada does not, the US dollar will often rise against the Canadian dollar.
  • US Dollar Trends – The exchange rate can also influence the Canadian dollar. The debt-to-GDP ratio has an important impact on the Canadian dollar.
If you are considering a US GIC, keep some of the pros and cons in mind. Remember that they are not CDIC insured and there is a potential for a loss while investing.
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