For policy holders looking to protect their capital, they may turn their attention to Guaranteed Interest Accounts. As we know, insurance policies offer a wide variety of investment choices that could be overwhelming at times. For example, universal life policies offer a range of fixed income and equity investment choices, allowing the policy holder to establish an asset mix that they may be comfortable with. In contrast to permanent insurance policies where the insurance company decides how the funds are invested.
Investment Choices
A policyholder of a life insurance contract can decide how he wants his premiums spread out over a number of different investment choices. Whether the investment mix consists of equities or bonds, the policyholder is able to adjust the mix over time and address their ever changing investment objectives or risk tolerance.
Investment choices vary depending on the insurance company and policy. In addition to equity and fixed income choices, below are common low risk options.
Daily Interest Accounts
Daily Interest Accounts (DIA) are known to offer a minimum rate of interest based on a specific benchmark such as a 1-year Government of Canada treasury bills. With a daily interest account, your principal cannot fall below 0% rate of return, thus making your principal guaranteed. Keep in mind that inflation may erode your purchasing power if your funds are tied in the daily interest account for a long period of time.
Guaranteed Interest Accounts
Guaranteed Interest Accounts, also known as GIAs offer a fixed rate of interest for a specific term. They closely resemble guaranteed investment certificates (GIC) but with longer term. For example, terms for GIAs can be for 1, 3, 5, 10, or even 20-year terms.
At the end of the term once a GIA matures, the policyholder has choice to roll over the funds into a policy’s active investment account or renew the GIA. The interest rate offer is tied to a specific benchmark such as to a yield of a Government of Canada bond or treasury bills. With guaranteed investment accounts, your principal is protected and guaranteed but be aware that a penalty may apply if funds are redeemed prior to maturity.
Term Deposit Accounts
A policyholder may also choose to invest in a term deposit account (TDAs). TDAs are long term simple interest accounts that provide a reliable stream of income within a retirement income fund or a life income fund. These accounts are recommended for retirees as they provide a guaranteed income with interest deposited to your bank account on a monthly or annual basis. Terms and offerings vary from insurer to insurer.
Benefits of Guaranteed Interest Accounts
Stability – Deposits made into a Daily Interest Account, Guaranteed Interest Account and Term Deposit Accounts are fully guaranteed and accessible, pending any withdrawal fees. These types of investment accounts protect your capital and allow you to diversify from the traditional equity and fixed income asset classes.
Competitive Rates – The rates for Guaranteed Interest Accounts are tied to an underlying index and reflect current market environments.
Creditor Protection – As the accounts mentioned above are an insurance protect, your funds are protected from creditor, subject to conditions
Estate Planning – As insurance contracts allow you to name a beneficiary to the policy. By doing so, the funds would be passed directly to the named beneficiary allowing you to avoid probate, legal and executor fees.
Safety – The Guaranteed Interest Accounts are protected by Assuris which guarantee the funds in the accounts if a member company files for bankruptcy.
For policy holders looking to protect their capital, it’s recommended that they ask their insurance agent for more information on these type of accounts.
