Protecting Your Deposits

Why would a 20 year old buy 5-year term life insurance? Do they think they’re going to die in the next five years? Well, of course not, but they may want to take steps to protect their loved ones in the unlikely event that were to happen. I’m going to talk about something different. I’m going to talk about Canada Deposit Insurance Corporation (CDIC). But I want to stress, it is not that I’m specifically concerned about Canada’s banking system. It’s one of the most stable banking systems in the world. But, it’s COVID-19, and we’ve been hearing some pretty scary things. CMHC is saying housing prices could plunge 18%. Think about that for a moment and how it could impact the banks. We’re seeing stock prices go up and down in dramatic fashion. It seems no matter who you are, you’re at least a little bit concerned about what wave 2 of COVID-19 could bring. So it only makes sense that you understand how Canada Deposit Insurance Corporation works, and that you make sure that your deposits are structured so that you are well protected.

Just like how our students can study anywhere, I can work anywhere remotely. I just got up North and it’s a rainy day in Muskoka. So I figured I’d bang out the rest of this video. Before doing so, I want to stress that these videos are geared towards students that are preparing for specific exams. It’s not deemed to be tailored investment advice. If you want to know how CDIC coverage might impact your specific situation, be sure to talk to your advisor, and I’m also going to provide a link below to the CDIC website, where you can find all of the details.

In the video, you’re going to see a question taken from our exam preparation tools.

Investor Karim has heard about Canada Deposit Insurance Corporation protects certain deposits if a member institution were to fail. Karim has $250,000 sprinkled across several accounts and wants to maximize his coverage. What would you recommend?

a) Have multiple accounts with the same financial institution but with different branches
b) Hold deposits with maturity dates of 5 years or more
c) Hold the financial institution’s GICs, preferred shares, and common shares.
d) Hold deposits with various financial institutions

Here are the top four things that you want to know for exam purposes. You’re also going to get lots of practice when working with the SeeWhy exam preparation questions.

Number 1: Coverage is per member institution, not per branch. So having accounts at many branches with the same financial institution is not going to increase your coverage. When you walk into a financial institution, normally on the front door, you’ll see a little sticker that will indicate whether they’re a member of CDIC. But if in doubt, just ask.

Number 2: There is separate coverage for different categories of accounts, such as your personal account or your RRSPs or a trust account. You could potentially have $100,000 in your bank account, and a separate a $100,000 in deposits in your RRSPs, with the same financial institution and both would be covered.

Number 3: This is really important. It only covers deposits, not investments. Remember that CDIC stands for Canada Deposit Insurance Corporation. It covers things like money deposited in a bank account, or a term deposit or GIC; it does not cover investments. If you have invested in a bank’s common or preferred shares, that isn’t going to be covered. Again, that’s a risk of investing. If you invest in bank shares and they don’t perform that well, CDIC isn’t going to cover it. That’s an investment. It’s not a deposit
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Number 4: Funds must be payable in Canada.

With this in mind, let’s circle back and tackle the question.

Answer a) Have multiple accounts with the same financial institution, but with different branches. That isn’t going to increase your coverage amount. Remember, coverage is per member institution, not per branch. So, we can eliminate answer “a”.

Answer b) Hold the deposits with maturity dates of five years or more. That is not going to increase the coverage. In fact, deposits with a maturity date of more than five years, there was a time when these weren’t covered. Well, it’s covered now – it’s a recent change, but it certainly isn’t going to increase your coverage.

Answer c) Hold the financial institution’s GICs, preferred shares, and common shares. Remember that CDIC only covers deposits, not investments (such as a financial institution’s preferred shares or common shares), so we can eliminate answer “c”.

And, finally, answer d) Hold the deposits with various financial Institutions. Assuming they are members, that would increase your coverage, so if you had deposits with Bank A, Bank B, and Bank C, that certainly will increase your coverage. So, answer D is correct.
Thanks everybody for reading this and watching the video. I hope you found the content helpful.