Opening up a savings account is a crucial step for you, especially if you want to gain control over your finances. Saving money is a big part of any financial plan, but there are many different savings accounts with different fees and interest rates, making it hard to choose one.
A guaranteed interest account (GIA) is one of the options for an interest account to open if you want to save money for a directed purchase or use it as an emergency fund. Guaranteed interest accounts also come with certain tax advantages.
But there’s a lot to unravel here, and we haven’t even mentioned investments. So let’s see how this savings account works, what it offers, and how you can use it.
What Is a Guaranteed Return?
To better understand these interest accounts, you must understand a guaranteed return. When an investment offers a fixed rate of return, no matter what happens to the market, this is a guaranteed return.
Therefore, you will earn the same interest income whether you earn or lose money on the market. Not all investment plans offer a guaranteed return. For example, if you want to create investment strategies based on stocks, you will not receive the guaranteed income as the stock value changes.
Before making investment decisions, establish clear investment objectives and learn more about a guaranteed return and the market you plan to invest in.
What Is a Guaranteed Interest Account (GIA)?
A guaranteed interest account (GIA) is a savings account that provides a guaranteed interest rate for a specific period. The guaranteed interest rate is locked for as long as you have your account, and it can’t be changed.
Usually, these accounts last for five years or more, but this depends on what you plan to use them for and what different life insurance companies offer. For example, guaranteed interest accounts will not be used the same way for emergency funds and investments.
Interest Rate Risk is Still Present
Although GIAs are low-risk investments, there is some interest rate risk you need to be familiar with. Even though you get a fixed interest rate on your GIA, the market interest rates can fluctuate, which means that the value of your account can go down if the interest rates rise.
If that is the case, investors will look for different opportunities because of the low market value, and they will explore different investment options.
Despite this, GIA is still a low-risk investment. It can’t earn as much money as with stock or mutual funds, but at least it won’t lose the principal, and it’ll have some growth.
Guaranteed Interest Account Isn’t the Only GIA Acronym
Now that you know the basics, we want to set things straight before we proceed any further with the coverage. There are various other financial terms that use the acronym GIA. If you Google GIA (a financial term and not the Gemological Institute of America), you will get:
- Guaranteed interest accounts
- Guaranteed investment accounts
- Guaranteed interest annuity
You are already familiar with the GIAs we are covering here. We’ll just briefly explain the other two terms so you don’t face any confusion if you conduct any further research on the topic.
Guaranteed Investment Account: Brief Overview
A guaranteed investment account is the same as a guaranteed interest account, and the terms can be used interchangeably by different financial institutions and a life insurance company.
Don’t let this confuse you: If you see investment or interest written, these both refer to the same term.
Guaranteed Interest Annuity: Brief Overview
However, a guaranteed interest annuity is something different. It is a type of annuity contract that offers a guaranteed fixed interest rate for a specified term. It is similar to GIA, but with a few key differences.
An annuity is a financial product offered by insurance companies that provides regular payments to the holder over a specified period of time, usually after retirement. A GIA is a type of annuity that guarantees a fixed interest rate rather than a variable rate tied to performance. The fixed rate is set at the time of investment, and the investment term is typically several years, after which the annuity may be renewed or cashed in.
The guaranteed interest rate and the guaranteed payments make GIAs a low-risk investment option for those looking for stability and predictability in their returns.
What Is the Difference Between GIC and GIA?
Suddenly, we introduce GIC, another similar term used often in this context. GIC stands for guaranteed investment certificate.
With a GIC, the investor deposits a sum of money for a fixed term, usually one to five years, and earns a guaranteed interest rate over that term. The interest rate is set at the time of investment, and the issuer guarantees the investment, typically a financial institution. The investment is low-risk because the principal amount is guaranteed and the interest rate is fixed. This gives the investor stability and predictability.
However, the returns on a GIC are often lower than those offered by other types of investments, such as stocks or bonds.
The Main Differences Between GICs and GIAs:
- Issuer: GICs are typically issued by banks and credit unions, while insurance companies and pension funds often issue GIAs.
- Investment terms: GICs are typically available for investment terms ranging from one to five years, while GIAs may have longer investment terms of several years or more.
- Access to funds: With a GIC, the investor’s funds are locked in for the investment term, and early redemption may incur a penalty. In contrast, some GIAs allow for partial withdrawals or surrender of the contract without penalty, although the terms and conditions vary between different GIAs.
- Interest rate calculation: GICs typically pay a fixed interest rate set at the time of investment, while the interest rate for some GIAs may be tied to performance or other factors, in which case the returns may be higher or lower than the guaranteed rate.
Money Market Account
There’s one more account we need to address that is very similar to the GIA, and that is the money market account. It is considered one of the accounts where money market funds are FDIC insured.
Compared to the GIA, the biggest difference is in interest rates. While both offer competitive rates, GIA has a guaranteed return, whereas interest rates on money market accounts can change.
Also, these accounts often let you write checks and use debit cards, which makes them more like checking accounts. The income potential with money market accounts is bigger, and they are more flexible, but that also increases the risk.
Investment Strategies and Opportunities
Although the GIA is good for saving money, remember that it is also called an investment account.
To invest in a GIA, you deposit a lump sum of money for a specific period, usually up to a few years.At the end of the term, you receive the principal amount plus the interest earned, which is calculated based on the guaranteed interest rate.
There are some limitations and penalties for early withdrawal, which aren’t the case with other money market accounts or a whole life insurance policy.
The low-risk investments and simplicity are what make GIAs a good choice for those new to investing.
Here’s how it works:
Suppose you have $10,000 that you want to invest for a period of 2 years. You find a financial institution that offers a Guaranteed Interest Account with a fixed interest rate of 2% per year. Here’s what your investment would look like:
- At the end of the first year, you would have earned interest of $200 ($10,000 x 2% = $200).
- Your account balance would be $10,200 ($10,000 + $200).
- At the end of the second year, you would have earned interest of another $204 ($10,200 x 2% = $204).
- Your account balance would be $10,404 ($10,200 + $204).
At the end of the 2-year term, you would receive the full $10,404, which includes your original $10,000 investment plus the $204 in interest earned over the 2 years.
This is a straightforward example that should help you understand GIA investments and how they work, but there are some factors at play that we didn’t include here. The most common ones include:
- Some GIAs come with market value adjustments that offset the market interest rate risk, preventing your GIA from dipping in value.
- Although GIA is a secure investment, market volatility is still a factor. If there are no market value adjustments, the market volatility and the market’s interest rates will affect your account’s value.
- Like junk bonds, this isn’t a good investment option for seasoned investors due to low risk and low income. More seasoned investors usually explore other investment options such as mutual funds, government bonds, corporate bonds, and different kinds of stocks, as it gives them more freedom.
8 Benefits of Guaranteed Interest Accounts
Like other types of investment and savings accounts, GIAs offer some advantages to their users. We listed them here:
- Savings Stability – GIA accounts provide savings stability to anyone who uses it. They are not tied to the stock market or other financial markets, and although there’s some interest risk, GIA investors generally earn cash at the end of the term.
- Competitive Rates – You will keep the principal you invest while also earning through competitive rates offered by almost every life insurance company. When looking for GIA investment options, explore each insurance company individually and determine their interest rates.
- Creditor Protection – Your GIA may provide creditor protection as an insurance contract. Obviously, read the insurance contract carefully as each life insurance company provides different conditions.
- Named Beneficiary Exists – This account acts similarly to life insurance in some segments. Your named beneficiary will receive the proceeds of GIA in case you die. Depending on the case, they will likely not have to deal with probate and other fees and taxes imposed by the government.
- Safe and Secure Investment – Sound investment advice suggests investing in something you know will earn you money and a GIA account. There is a guarantee to get your cash back and with little to no fees.
- FDIC Insured – Most GIAs offered by banks are insured by the Federal Deposit Insurance Corporation (FDIC), which provides deposit insurance up to $250,000 per depositor per bank. This helps to reduce the risk of loss if the bank or an insurance company fails.
- Low Risk – GIAs are one of the safest investment options with a guaranteed rate and fixed income. They are a great basis for later investments.
- Short-Term Commitment – GIAs last between several months and several years, which is great for people who want to invest briefly and earn money.
Should I Open a Guaranteed Interest Account?
Not everyone will benefit fully from GIA, and only specific groups of people should consider it. So keep this in mind before you make your choice.
Investors looking for a short-term commitment while avoiding risky investments should consider GIA. Also, more conservative people looking for different investments that will help them diversify their portfolio are included.
However, investing isn’t the only feature of GIAs. The account is also used for savings and has a large number of tax advantages. Seniors can also keep their money in an interest account, use it as an emergency fund, and make their money grow without much effort.
5 Other Savings Options and Accounts
GIA isn’t the only investment account that offers a guarantee on your returns and income increase. There are a lot of alternative options out there that would suit you better.
Some of the alternatives we will mention here are slightly different, but it is up to you to choose which one works for you and your lifestyle.
ISAs (5 Different Types)
If you want to increase your income and enter the financial market, ISAs are the best accounts to select. ISA stands for individual savings accounts, and there are five types of ISAs available:
- Cash ISA
- Stocks and Shares ISA
- Innovative Finance ISA
- Junior ISA
- Lifetime ISA
We will not get into details for each of these, but you can easily determine which ISA is for you before you get into it
Money Market Accounts
We’ve already covered it, but this is another great alternative to GIA and it’s the one that offers you extra flexibility and some other tools that you can use to generate income.
High-Yield Savings Accounts
Banks and other financial institutions offer High-Yield Savings Accounts, which offer higher interest rates than traditional savings accounts. They usually have a minimum balance requirement, but they usually have better interest rates and sometimes fewer fees than other ways to save.
The interest rate on high-yield savings accounts is typically tiered, meaning that the more you save, the higher your interest rate will be. Most high-yield accounts add up the interest they earn every day, which makes the balance grow faster over time.
Different Types of Bonds
You can also consider investing in different types of bonds, including corporate, municipal, and government bonds. In general, when the bonds reach their maturity date, people receive periodic interest payments and the return of their principal.
Whole Life Insurance Policy
Another great way of generating wealth is through a life insurance policy, specifically, whole life. Even though you can’t be sure that your money will grow after you sign the insurance contract, if you take care of your policy well, it will give you more than just the death benefit.
Not only will your named beneficiary receive the money after you die, but you can also use the money from the policy’s cash value for some of the expenses you must cover while alive!
However, each whole life insurance policy needs to be custom-made for it to be effective, which makes it crucial to find the right mutual insurance company that will tailor the policy to your needs.
Whole-life insurance policies don’t come with investment options, but there are different ways to use your policy to create wealth. So in the end, you’ll get a death benefit and a chance to fund your perfect lifestyle!