What’s a GIA?
A guaranteed interest account (GIA) is an insurance contract that pays interest at a guaranteed rate, like a bank-issued guaranteed investment certificate (GIC). The contract can be for a short time or a long time. When that time is up, you can choose to reinvest your original investment plus any interest you may have earned.
When your money is in a GIA, the interest rate doesn’t change with the markets. When you invest your retirement contributions in these accounts, they earn the current interest rate at the time of the deposit. Interest is credited to your account monthly and is compounded once a year. Compounding means that your money earns interest, and that interest earns interest, and so on, which can really add up over time.
But what if you need to move or take your money out before the GIA contract time is up? The insurance company applies an MVA to figure out what your investment is worth now.
How does an MVA work?
- When you put money in a GIA, the insurance company assigns an interest rate, which it guarantees if you leave the money in the GIA for the full term of the contract. The rate is based in part on current interest rates.
- The insurance company then invests your money in other investments that have the same term. If interest rates go up during the term, the value of these investments goes down. If interest rates go down, the value of these investments goes up.
- If you ask to take your money out of your GIA early, the insurance company must take the money out of those investments early. This can mean a gain or a loss for the insurance company, depending on whether the current interest rates went up or down. They then pass the gain or loss on to you. That’s the MVA.
- Let’s say that 1 year ago, you put $100 in a 3-year GIA at an interest rate of 1%. The value at the end of the full 3-year term would be $103.03.
- Right now, after one year, the value of your GIA would be $101. Meanwhile, current interest rates went up to 4%.
- If you take the money out now, when current interest rates are at 4%, the MVA will lower the amount you get. You’ll get $95.27 after the insurance company deducts an MVA of $4.73.
- But if you then reinvest the $95.27 at 4% for 2 years in a GIA, the value at maturity is $103.04.
Why do interest rates matter?
If you need to move or withdraw money from your GIA early, interest rates can positively or negatively affect your MVA and your retirement savings—timing is important!
When interest rates are lower
Depending on what the guaranteed interest rate for your investment is, you could benefit if interest rates are down when you cash out early. If the interest rate is lower than the rate on your GIA when you take the money out, the MVA will increase the amount you get.
However, even though you’ll get more than your original deposit, you’ll get less than if you were to leave your money in place until the GIA matures.
When interest rates are higher
You could lose money if interests rates are up when you cash out early. If the interest rate is higher than the rate on your GIA when you take the money out, the MVA will lower the amount you get.
In either case, if you reinvest the amount the insurance company pays you at the current interest rate, you’ll have the same amount at the end of the original term as if you’d left the original money in the GIA for the full term. It all balances out.
You may want to seek the help of a financial advisor to see if there are other financial consequences to moving or withdrawing your investments early.
The commentary in this publication is for general information only and should not be considered legal, financial, or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.