Guaranteed Investment Contract vs Annuity

Today’s topic is Guaranteed Investment Contracts, often called GICs, versus annuities.

Many people have not heard the term GIC in a long time. It was more common years ago, especially inside retirement plans or negotiated institutional arrangements. Occasionally someone will ask about them, usually to see if you know what a GIC is.

GICs are fixed instruments that provide principal protection and liquidity. They are typically found inside retirement plans or negotiated with institutions and life insurance companies. They are not as widely available today as they once were.

Because of that, comparing GICs to annuities is not always a perfect comparison.

Key Takeaways

• Guaranteed Investment Contracts are fixed instruments typically found inside retirement plans
• They provide principal protection and fixed interest rates
• They are not commonly available to individual consumers today
• Multi-Year Guarantee Annuities are the closest comparable product available to consumers
• Annuities should only be purchased for contractual guarantees

What Is a Guaranteed Investment Contract?

A Guaranteed Investment Contract is a fixed instrument that provides principal preservation and a guaranteed interest rate.

These products are typically used inside retirement plans or negotiated with institutions. They were more common in the past than they are today.

In many cases, they involve large institutional investments where the terms are negotiated directly with life insurance companies.

Because of that structure, they are rarely available to individual investors outside of retirement plans.

They are still around, but they are not widely available.

Comparing GICs to Annuities

When people compare GICs to annuities, the closest comparison would be a Multi-Year Guarantee Annuity.

A Multi-Year Guarantee Annuity is often described as the annuity industry’s version of a CD.

It is a Fixed Annuity that:

• Protects principal
• Provides a guaranteed interest rate
• Locks in that rate for a specific period of time

Each state regulates these annuities, which means rates vary by state and duration.

When someone wants principal protection and a guaranteed interest rate, that is where a Multi-Year Guarantee Annuity fits.

GICs Are Not Lifetime Income Products

One important distinction is that GICs are not lifetime income products.

They are principal preservation products.

When you start comparing them to Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, or Income Riders, you are talking about completely different objectives.

Those products are designed for lifetime income.

A GIC is not designed to provide income for life.

The Two Questions That Drive the Decision

When evaluating annuities or any financial product, the decision starts with two questions:

1. What do you want the money to contractually do?
2. When do you want those contractual guarantees to start?

Those two questions determine whether an annuity is appropriate.

The PILL Framework

Another way to think about this is through the PILL framework.

P stands for principal protection.
I stands for income for life.
L stands for legacy.
The other L stands for long-term care.

If the money does not need to contractually solve for one of those categories, then an annuity is not necessary.

Annuities are not designed for market growth.

They are designed for contractual guarantees.

Growth vs Contractual Guarantees

Many products are marketed with the idea that you can protect your principal and receive market-like returns.

If that were actually true, large financial institutions would only use those products.

If something sounds too good to be true, it usually is.

Annuities should not be purchased for hypothetical projections. They should be purchased for contractual guarantees.

The Role of Multi-Year Guarantee Annuities

Multi-Year Guarantee Annuities function similarly to GICs in terms of principal protection and fixed interest rates.

They:

• Protect the principal
• Provide a guaranteed rate
• Have no market exposure
• Have no annual fees
• Lock in the interest rate for a chosen period

When held in non-IRA accounts, the interest can grow tax deferred until it is withdrawn.

How to Identify the Right Annuity

There is no single “best” annuity.

Anyone claiming there is a universal best product should raise concerns.

The right annuity depends on:

• What you want the money to do
• When you want the guarantees to begin
• Your specific financial situation

Annuities are commodity products. The goal is to identify the highest contractual guarantee available for your specific situation from a highly rated insurance company.

Bottom Line

Guaranteed Investment Contracts are fixed instruments that provide principal protection and fixed interest rates, typically inside retirement plans or institutional arrangements.

They are not widely available to individual consumers today.

For individuals looking for principal protection and fixed interest rates, Multi-Year Guarantee Annuities provide the closest comparable option.

Annuities should be evaluated based on contractual guarantees and the specific financial objective they are meant to solve.

FAQs

What is a Guaranteed Investment Contract?

A Guaranteed Investment Contract is a fixed instrument that provides principal protection and a guaranteed interest rate, typically used inside retirement plans.

Are GICs available to individual investors?

They are rarely available directly to consumers and are usually negotiated through retirement plans or institutional arrangements.

What annuity is most similar to a GIC?

A Multi-Year Guarantee Annuity is the closest comparable product for individual investors.

Are GICs lifetime income products?

No. GICs are principal preservation products and are not designed to provide lifetime income.