If you’re over 65, a GIC alternative

Individual investors who have money invested in term deposits or Guaranteed Investment Certificates through a bank or credit union should also explore insurance contracts often referred to as Guaranteed Interest Annuities, or GIAs.

First off, answer the following questions:

  • What are the fees to sell my investments if I were to pass away before they mature?
  • Are my investments subject to probate fees?
  • If I were to pass away, how quickly could my beneficiaries receive these funds?  4)  What is the best way to structure my affairs to reduce estate costs?
  • Does the interest income I earn qualify for the pension income amount?
  • Am I able to split the interest income with my spouse?
  • Am I able to name a beneficiary for my non-registered term deposit or GICs?

By answering the above questions you will better understand why we feel there is a good alternative for some investors aged 65 and older.  Insurance products have benefits, especially when it comes to estate planning.  Insurance is useful to provide risk management, tax benefits, creditor protection, and the ability to name specific beneficiaries (even for non-registered accounts).  Probate fees may be avoided by naming beneficiaries as opposed to your estate.

Insurance companies offer very similar products to Guaranteed Investments Certificate; but come with some added benefits.  Collectively these products are often referred in the industry as Guaranteed Interest Annuity but each insurance company has a specific name for their products – Manulife’s are Guaranteed Interest Contract; Standard Life calls them Term Funds; and Canada Life has Guaranteed Interest Terms.

GIAs have benefits that term deposits and GICs do not offer and we will illustrate this comparison using Helen Stevenson, a woman who has been widowed.

Helen has a net worth of approximately $1 million split between her personal residence ($600,000) and non-registered bank GIC monthly pay portfolio ($400,000).   Helen is in her mid eighties and came to see us to prepare an estate plan.  She is in the process of selling her home and moving into an assisted living home.   In our estate plan for Helen she was surprised to learn that if she were to pass away today that her entire estate would be subject to probate fees.  We estimate probate fees alone to be approximately $14,000 as all investments, including personal residence, are currently flowing into her estate and subject to a fee of 1.4 per cent.     

Cost Savings:  GIAs are able to bypass the estate.  This will be a considerable cost savings for Helen through reduced fees for executor, probate, legal, and accounting, as well as other costs associated with a typical estate.  By converting her GICs to GIAs she would save $5,600 in probate alone; this does not include other possible savings.

Naming a Beneficiary:  The ability to designate a beneficiary allows you to control who receives the proceeds of your investments.  There is no fee to change beneficiaries, and this process is much easier than changing your Will.  This is especially important for investors who own term deposits and GICs in an individual non-registered account. Helen established four different GIA contracts with different insurance companies, each for $100,000.  The first contract has her four children named as beneficiary, the second contract names her eight grandchildren, the third contract names four friends, and the final contract names four charities.  Helen will live off of the monthly income during her lifetime.  When she passes away, the proceeds from the contract are paid directly to each named beneficiary.  Helen can easily update the beneficiary selection to the contracts with no cost.

Redemption:  There is no cash surrender charges at death for GIA contracts.  Your named beneficiary will receive the original deposited amount plus any accumulated interest.  Proceeds are paid out directly to the beneficiary with minimal delay.

Privacy:  Proceeds distributed from insurance products to named beneficiaries not only bypass probate but also avoid public record.  Every family situation is unique.  Often at times a solution to a complex situation is an insurance product that bypasses the estate and public record.  This is particularly important these days with complicated extended or blended family situations.  Creditor protection is also a benefit of insurance contracts available in most provinces across Canada.

Converting Interest Income to Pension Income:  Interest income earned from GICs is reported as interest income in Box 13 of a T5 slip.  Income reported in this box is not a qualifying source for the pension credit or pension splitting.  GIAs are subject to special rules under the Canadian Income Tax Act (accrued income–annuities reported in box 19 of a T5 slip).  Income reported in box 19 may provide benefits if you are 65 or older, especially if you are married or do not earn other qualifying pension income.  The amounts reported in box 19 qualify as pension income for investors who are 65 or older.  This is important as it enables individuals to claim the pension income amount (if not already claimed).  The pension income amount effectively allows investors to exempt up to $2,000 of eligible income each year.  Note that couples can each take advantage of this.

Pension Splitting:  An additional benefit of GIAs is the ability for couples eligible for the pension income amount to also split the income with their spouse.  This can be done without the concern of the Canada Revenue Agency applying the attribution rules of one spouse in the household earned the base capital earning the income).   The attribution rules are complex but effectively prevent inappropriate income splitting.

Flexibility and Protection:  You may choose between different payment options such as monthly, quarterly, semi-annually, or annually.  You may also choose from different issuers and maturity dates with a wide selection of terms that fit you.  GIAs can typically be purchased to a maximum age of 100.  GICs have CDIC coverage for up to five years.  GIA contracts do not have a time limitation for coverage through Assuris (see www.assuris.com for further details).

Insurance companies have features relating to their GIA product that may be different from the general information above.  Not all investment advisors have the required license to sell GIAs.  When we are selling life insurance products we are acting as Life Underwriters.

Prior to acting on information in our columns we recommend you obtain professional advice to determine if GIAs may be suitable in your estate plan.