Tips to navigate this tricky topic
Not a week goes by that I don’t have a conversation with a client, investor, or executor of an estate about the differences between bank-issued GICs and life insurance-issued GIOs. Here are some tips on how to navigate this topic.
Guaranteed Investment Certificates (GICs) are a low risk, guaranteed interest option for many Canadian investors. GICs are easy to understand and offered by most banks, trust companies and credit unions. You choose how much you invest, know exactly how much interest (rate of return) you will receive and know the exact dollar figure that you will receive at maturity. You can choose the term, often one to five years, to match your specific needs. Interest can be paid monthly, annually or compounded and paid at the end of the term when the principal amount invested is also returned to you.
How are my GICs guaranteed?
The Canadian Deposit Insurance Corporation (CDIC) is a federal owned crown corporation. An arm of the Government of Canada that protects eligible deposits at each member financial institutions to a maximum of $100,000, per separately insured category, to protect in the event of a bank failure. Deposits must be in Canadian currency, have a term of five years or less and also payable in Canada.
Life Insurance GIOs
Guaranteed Interest Options (GIOs) issued by life insurance companies offer a guaranteed interest payment, much like GICs, and also can be chosen for a specific term. Life insurance GIOs do offer longer 10 year terms and some life insurance companies offer terms even longer than 10 years.
How are my GIOs guaranteed?
Assuris is the not-for-profit organization that protects Canadian policyholders if their life insurance company should fail. The role of Assuris is to protect policyholders by minimizing the loss of benefits and ensuring a quick transfer of their policies to a solvent company, where their protected benefits will continue. Imagine that you are disabled and receiving disability income of $3,000 per month from your life insurance company. Consider what would happen if your life insurance company fails? Assuris will ensure another solvent life insurance company will continue to pay at least 85% of your monthly benefit and accept the terms and conditions of your existing policy. If you have a deposit product, like a GIO with a life insurance company then Assuris will ensure another solvent life company will protect 100 per cent of your deposit up to $100,000.
Estate Advantage GIOs
Added benefit with a GIOs is the ability to designate a beneficiary and thus bypass probate and the estate settlement process. This will save you time, money and stress! GIOs also can offer creditor protection if the named beneficiary is a preferred beneficiary. A spouse, child, grandchild, or parent all are examples of a preferred beneficiary.
Consider Lily and Nicholas
Lily has recently lost Nicholas, her husband of 61 years. Lily and Nicholas have accumulated substantial investment assets as a result of a successful family run business. Lily is now the sole owner of their principal residence plus their Registered Retirement Income Fund (RRIFs) plus their Tax-Free Savings Account (TFSA) plus also another $400,000 in jointly held GICs at their bank. Lily has three adult children each with partners, each with children of their own. All of the assets that Nicholas and Lily owned will pass tax efficiently into Lily’s possession on a tax-free rollover. The home was registered in both Nicholas and Lily’s name and this joint with rights of survivorship registration will change to just Lily. Lily is the named beneficiary of Nicholas’s RRIF and this will now be amalgamated with Lily’s own RRIF. She will continue to take monthly income from her RRIF and but will increase her monthly payments as a result of adding Nicholas’s $200,000 RRIF to her $220,000 RRIF. Lily is required to take the minimum from her RRIF based on a percent of the market value of her RRIF, so her requirement has increased as a result of adding Nicholas’s RRIF to her own RRIF. Nicholas’s TFSA has named Lily as the successor holder and now this TFSA will belong to Lily. Lily will continue to accumulate TFSA contribution room January of each year. The six GICs at the bank are staggered with various maturity dates and interest rates. Each GIC is registered joint with rights of survivorship so Lily has a decision to make. She can choose to change the registration from both Nicholas and Lily to just her name and continue with the same term, same interest rate as the original GIC or she can choose to break the term and instruct the bank to payout the full amount of principal originally invested plus any accumulated interest.
Why does Lily want to redeem all her bank GICs?
Lily wants to redeem all the bank GICs and re-invest the proceeds into GIOs issued through a life insurance company. GICs in her name alone at the bank would be subject to probate when she eventually passes, and she wants her GICs to pass to her three adult children quickly, without probate fees and stress free. A GIO issued by a life insurance company allows Lily to name a beneficiary. If Lily named her three adult children as beneficiary, then once Lily had passed the life insurance company would require a claimant form signed by each beneficiary to claim proceeds and a copy of the death certificate. The life insurance company would not see the will, nor would the life insurance company require the will to be probated. The life insurance company will pay out proceeds quickly to the named beneficiary by cheque or electronic fund transfer (EFT) to the beneficiary’s bank account.
The goal is to create tax efficient retirement income that will last your lifetime. Consider what will happen when the first spouse passes and also when the final spouse passes and assets are transferred to the next generation. Work with a trusted professional and plan for the successful transition of your assets to your children and grandchildren.
Pam Mundell is the sole principal of Pam Mundell Financial Planning Services in Kingston, Ontario. She is a Certified Financial Planner (CFP) Chartered Life Underwriter (CLU) and Certified Health Insurance Specialist (CHS). She can be reached for questions and comments at firstname.lastname@example.org