Generally speaking, if an individual needs insurance protection for something, be it a car or a house, they must be proactive and purchase it on their own. However, when it comes to bank deposits in Canada, people are already covered.
As we’ve explained previously, most deposits at Canadian financial institutions are covered by either federal or provincial insurance. The Canadian Deposit Insurance Corporation (CDIC), a government-run entity, protects the savings of consumers in federally-chartered banks. For those who do their banking at credit unions, each province has a deposit insurance plan that provides similar coverage.
The goal of deposit insurance is straightforward: to ensure the safety of depositors’ money in the unlikely event that a bank fails. Deposits are liabilities of a bank, so if it were to go bankrupt, savers might not get their money back were it not for government backing. And if people can’t trust that their money is safe, they’ll be prone to withdrawing funds en masse at the first sign of trouble with a particular financial institution. Banks require deposits in order to operate, so anything that causes such a bank run would be hazardous to the financial system.
It’s important to note that deposit insurance coverage is not unlimited. The CDIC, with whom the vast majority of Canadians are insured, covers deposits of up to $100,000 per eligible account. On the one hand, this is a substantial amount of money. So most Canadians probably fall within this maximum.
Yet there are savers who will have deposits exceeding the $100,000 limit. Your first thought may be that they’re ultra-wealthy Canadians. But it’s also possible that a very cautious investor, such as a retiree, will have a large portion of their net worth in various savings vehicles. In doing so they could conceivably have more than $100,000 in either a savings account, chequing account, or GIC.
Anyone who finds themselves in this position would be wise to strategically maximize their CDIC coverage. Otherwise, if a bank does fail, a depositor could lose any savings in excess of the $100,000 coverage.
How to go about maximizing CDIC protection? Before answering this, it’s helpful to review just what’s covered. According to its website:
“We insure eligible deposits at each member institution up to a maximum of $100,000 (principal and interest combined) per depositor per insured category. To be eligible for deposit insurance, deposits must be payable in Canada and in Canadian currency. We do not cover foreign currency deposits including U.S. dollars. Eligible deposits include:
- Savings accounts
- Chequing accounts
- Term deposits, (such as GICs) with original terms to maturity of five years or less
- Debentures issued to evidence deposits by CDIC member institutions (other than banks)
- Money orders and bank drafts issued by CDIC members
- Cheques certified by CDIC members”
The key here is that the CDIC provides separate coverage for deposits held in seven different kinds of eligible categories. These include:
- Deposits held in one name
- Deposits held in more than one name (i.e., joint deposits)
- Deposits held in an RRSP
- Deposits held in a TFSA
- Deposits held in a RRIF
- Deposits held in trust
- Deposits held for making tax payments on mortgaged properties
Spreading deposits within the same bank
Let’s say you have $200,000 in a savings account. One way to maximize your CDIC coverage, assuming you’re married, would be to simply transfer $100,000 of the total into a joint chequing account at the same financial institution. Granted, you would not receive much, if any interest on the chequing portion, but with one simple action you would have made sure that the entire $200,000 was government-backed.
Spreading deposits among different banks
Using the same scenario of $200,000 in one savings account, you don’t actually have to settle for placing half the total in a chequing account where it won’t accumulate interest. Instead, you can find a competitive savings rate at another financial institution and transfer $100,000 there. That way, the CDIC once again will have you covered 100%. If either bank fails, you’re completely protected.
Better safe than sorry
One component of sound investing is diversification. The same applies to managing your savings. Even if you don’t worry about the soundness of your bank, it’s a good idea to diversify your deposits just in case. So if you find yourself in the situation where you have more than $100,000 in savings, give some thought to spreading your risk around, either within your bank or among different financial institutions. It’ll make sure you’re covered to the maximum and allow you to sleep easily at night.
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