What is a guaranteed investment contract (GIC)?
A guaranteed investment contract (GIC) is a type of pension plan funding instrument and an alternative to trust-fund plans, separate investment accounts and investment guarantee contracts.
It provides interest rate guarantees and protects the principal against loss.
Characteristics of GICs
Guaranteed investment contracts are a lot like the certificates of deposits (CDs), with the major difference that they can be purchased from insurance companies, and not at the bank.
Just like CDs, guaranteed investment contracts are safe investments, in the sense that their price is stable and not subject to fluctuations the way, for example, the value of stock and bonds is.
GICs are known under many different names so don't get confused when you encounter any of the following terms - a guaranteed fund, a fixed-income fund, a capital preservation fund and a stable-value fund. They all stand for the same type of agreement.
Advantages of Guaranteed Investment Contract
- GICs are considered safe investments because they lock in a certain interest rate for a certain number of years and are not affected by potential fluctuations in the stock market. They also protect the principal against potential loss.
- With a GIC, you might not reap the benefits of any favorable conditions of the stock market but nevertheless, earnings are adequate, in fact more substantial than those of CDs.
GIC Drawbacks
- The fees are sometimes too high for the small profits that a guaranteed investment contract can yield.
- The minimal gains that GICs ensure might result of people ending up inadequately insured after retirement.
- What is pointed to as the GIC's biggest advantage - the "guaranteed investment" - is actually not as guaranteed and secure as the name suggests. There are no federal regulations that guarantee the safety of investments under guaranteed investment contracts. GICs are typically guaranteed only by the insurer issuing them. This should keep you on the alert and make you check the financial stability of your insurer on a regular basis.
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