If you own a house or a car, there’s a good chance you own some sort of insurance as well. Bank accounts, too, come with insurance, except it doesn’t cost you anything in monthly payments. Insurance on bank accounts is provided by a federal Crown corporation known as the Canada Deposit Insurance Corporation (CDIC). This insurance is known as CDIC coverage. Maximizing your CDIC coverage is a strategic financial move than can protect your money.
The insurance policy protects your savings and some types of investments in the event that the bank holding your savings goes out of business. While the likelihood of a Canadian bank going out of business is slim, CDIC coverage protects your money. It also comes at no additional cost to its customers.
CDIC coverage comes with a few limitations, however. Certain investing accounts do not have coverage. Additionally, coverage does not exceed $100,000 per account. There are a few strategies that you can use to maximize your CDIC coverage. Below are easy options that can help you keep deposits over $100,000 protected.
What’s covered by CDIC insurance?
Deposits made into most types of bank accounts come with CDIC Insurance. Each account is covered up to $100,000. Accounts come with coverage include:
- Chequing Accounts
- High-Interest Savings Accounts and Savings Accounts
- Tax-Free Savings Accounts (TFSAs)
- Registered-Retirement Savings Plans (RRSPs)
- Guaranteed Investment Certificates (GICs) with terms five years or less.
- Money orders and bank drafts issued by CDIC members
- Cheques certified by members of the CDIC
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What’s not covered by CDIC Insurance
Generally speaking, the CDIC does not cover savings and investments with higher volatility. These accounts or financial products include:
- Mutual Funds
- Exchange-Traded Funds
- GICs with terms longer than five years and other term deposits
- Foreign Currency
- Treasury Bills
- Principal Protected Notes
- Debentures issued by banks, governments, or corporations
- Deposits with receipts
- Deposits that are not members of the CDIC (such as credit unions)
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Does CDIC insurance cover credit unions?
CDIC Insurance does not cover credit unions, but credit unions still come with deposit insurance. Credit unions are covered by provincial insurance, which differs from one province to the next. Every policy is different from the next, but every policy operates in a similarily to the CDIC.
Ways to Maximize your CDIC Coverage
Every Canadian citizen should make the most of their CDIC coverage, mainly since coverage includes the moment an account is opened. While it is usually unlikely that a Canadian bank will go out of business, it’s important to ensure that you and your finances are protected.
1. Use various saving and investing accounts
CDIC insurance might only cover up to $100,000 in an account, but each account includes coverage. By using multiple accounts, you can maximize the coverage of your CDIC insurance policy.
For example, if you own $250,000, $100,000 of that investment can sit in a high-interest savings account (HISA). Additionally, $63,500 can go into a tax-free savings account (TFSA); the amount is the current contribution limit for the year. Make sure you don’t exceed your TFSA contribution limit.
With $87,000 left, the options are still open if you like to keep all of your savings with one institution, as the remaining amount can be divided up into other accounts.
One of those accounts is the Registered Retirement Savings Plan (RRSP). Placing your money in an RRSP will reduce your yearly taxed income, though contributions must remain under your RRSP contribution limit to avoid a tax penalty. Another essential factor of RRSPs is that withdrawals are taxed.
You should also keep in mind that your TFSA or RRSP contribution limit remains the same, regardless of how many accounts you own.
Guaranteed Investment Certificates (GICs) are another suitable account option. GICs allow banks to borrow money from their customers for a set amount of time. In return, interest is granted at the end of the borrowing term. The catch for GICs is that customers can’t access their money before the investment reaches maturity. GIC insurance only covers terms that are five years in length or less.
The CDIC provides separate coverage for deposits held in seven 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 an RRIF
- Deposits held in trust
- Deposits held for making tax payments on mortgaged properties
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2. Save and invest with different institutions
Understandably, individual savings and investment accounts aren’t ideal for everyone, which is why using different institutions to harness your savings and investments is another acceptable way to maximize your CDIC coverage.
Using the same scenario of $250,000, splitting the amount between two financial institutions allows you to place $100,000 in an account with one institution, and the other half in a high-interest saving account issued by another institution. The remaining $50,000 can go into a high-interest savings account in a different financial institution. Of course, high-interest savings accounts aren’t the only option available.
Most Canadian banks are covered by CDIC insurance. There is no shortage of account options.
Be sure to get the excellent interest rate on the account you invest with, as well. Any account with a low-interest rate or no interest rate, such as regular savings accounts or chequing accounts, won’t keep up with Canada’s inflation rate. Your investments and savings will decrease in value as inflation rises.
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