Insuring Your BFF (Your Bank or Financial Firm)
An Introduction to Insurance and Risk Management – Part 8.2
In my last post, I wrote about Assuris, a body that insures you against the insolvency of a life insurance company. This post has to do with insuring against the insolvency of banks and credit unions.
CANADA DEPOSIT INSURANCE CORPORATION (CDIC)
You may have seen this or similar commercials online or on TV. Usually, these commercials are quite general, only reminding you that your deposits at the bank are insured. This post will investigate the extent of your coverage and some strategies you can use to extend that coverage.
What Accounts are Covered?
As the title of the corporation makes clear, this is “deposit insurance,” so it does not include investments like mutual funds, stocks, or bonds. However, if you hold a deposit product in an investment account, you may still be insured by CDIC. The list of covered accounts is straightforward:
- Chequing Accounts
- Savings Accounts
- Guaranteed Investment Certificates (GICs) and other term deposits with original terms of five years or less
- Must be in Canadian currency (if you have a US Dollar account at your local bank, it is not insured)
A Comment about GICs
Although there are GICs with terms to maturity of greater than five years, these are not currently insured by CDIC. For example, if you buy a 7-year GIC, there is no CDIC coverage for it throughout the life of that GIC. Even if two years pass, and the GIC now only has five years to mature, it does not become eligible. The original term must be five years or less.
What Categories are Covered?
Each account category has insurance coverage up to $100,000 at each member financial institution. So, for example, if you have a savings account at BlueBank and you have another savings account at GreenBank you have full coverage at each of those financial institutions. Here’s what coverage could potentially look like at any given bank:
|Deposits held in one name||$100,000||$100,000|
|Deposits held in more than one name||$100,000||$200,000|
|Deposits held in a RRSP||$100,000||$300,000|
|Deposits held in a RRIF||$100,000||$400,000|
|Deposits held in a TFSA||$100,000||$500,000|
|Deposits held in trust||$100,000||$600,000|
|Deposits held for paying taxes on mortgaged properties||$100,000||$700,000|
Now, let’s imagine a married couple who have all their financial assets at one bank. To simplify things, they are not yet retired so there is no RRIF, they don’t have any accounts that are held in trust, and they no longer have a mortgage, so the bank is not collecting their property taxes.
|Account||Insured Category||Spouse 1||Spouse 2||Joint||Total||Total Insured|
|Chequing||Held in more than one name||$ 100,000||$ 100,000||$ 100,000|
|Savings||Held in one name||$ 100,000||$ 100,000||$ 200,000||$ 200,000|
|GICs||Held in a RRSP||$ 150,000||$ 150,000||$ 300,000||$ 200,000|
|Savings||Held in a TFSA||$ 77,000||$ 77,000||$ 154,000||$ 154,000|
|Total Deposits||$ 754,000||$ 654,000|
You will no doubt notice that this couple’s RRSP accounts are not fully covered as they each have $50,000 more than the coverage limit of $100,000 per account.
Another thing to observe is that under their individual savings accounts, each has maximized coverage with $100,000 deposits. However, the interest that accumulates month after month will take the account values above $100,000 so that, while the accounts will continue to grow, the insurance coverage remains capped.
Ways to Extend Your Coverage
In the scenario where the couple each had greater than $100,000 in their RRSPs, they missed out on some of the insurance coverage. There is a potential resolution to this even within the same bank. Many banks can issue GICs under two or more separate corporations, each of which have their own CDIC insurance. One might be insured under the bank, another under the mortgage corporation and a third under a trust company.
You can also extend your insurance coverage by having your deposit accounts held at multiple CDIC-insured financial institutions. This can be somewhat bothersome of course, requiring you to take care of your paperwork.
I mentioned interest not being covered if your principal deposit is already at the $100,000 maximum. In that case, consider depositing slightly less than $100,000 so that the interest remains covered.
Another choice you may wish to make is to open a brokerage account so that you can have access to GICs from multiple issuing CDIC member financial institutions. At a discount brokerage that I am familiar with, you have the option of selecting from up to twelve different issuers. Theoretically, then, you could have up to $1,200,000 of CDIC coverage under the same insured category.
Pending Changes to CDIC
Earlier in this post I mentioned two limitations about coverage: currency and GIC term limits. These are scheduled to change effective April 30, 2020.
Currency: Coverage will be expanded to include eligible deposits held in foreign currencies.
GIC term limits: Coverage will be expanded to include eligible deposits with terms greater than five years.
Read here for a summary of other changes to CDIC coverage.
Almost all credit unions are provincially regulated and as such, any insurance coverage they have for their deposits is from a provincial body. CDIC provides a list of provincial deposit insurers here.
Coverage is similar to CDIC but there are variations. For example, the four western provinces do not place a dollar limit on the amount insured. For more information, look up your province on the list above if you have deposits at a provincially regulated credit union.
My next post will look at the investment side for insurance against firm insolvency, the Canadian Investor Protection Fund (CIPF).
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, accounting or legal decisions.