What Is a Window Guaranteed Investment Contract?
Let me explain what a window guaranteed investment contract, or WGIC, really is. It's a type of investment plan where you, as the investor, make a series of payments to an insurance company, and in return, you're guaranteed a certain return on your investment. This differs from other guaranteed investment contracts because you pay the principal in installments over time, not all at once upfront. You'll often see investors using WGICs with 401(k) plans and other defined contribution pension plans.
Key Takeaways
- A window guaranteed investment contract (WGIC) promises guaranteed returns from a series of installment payments paid in during the contribution window.
- After the window has closed, no further contributions can be made.
- The contract then matures for a period of several years before returning principal and interest to investors.
- Like all GICs, these products are considered low-risk and likewise carry lower average returns.
Understanding Window Guaranteed Investment Contracts
You should know that window guaranteed investment contracts resemble certificates of deposit sold at banks, but they may have either fixed or variable interest. Investors view WGICs as very safe investments. Since they involve little risk, they offer relatively small returns compared to other strategies. However, WGICs often provide better rates than what you'd get from a bank, which explains part of their appeal.
Smaller businesses find window GICs attractive, as do new plan start-ups or other companies that want a fixed and guaranteed rate throughout the year. The window refers to the period during which you can make payments and receive the guaranteed interest rate. Often, the issuer sets this window at one calendar year.
Your payments go into the insurance company's general account. Investments in this account generally consist of conservative options such as corporate bonds, commercial mortgages, and treasury securities.
From the Window to Maturity
Once the window closes and you can no longer make payments toward the GIC, the invested funds stay in the contract for a maturation period. This period generally lasts between three and seven years. During this time, the funds earn the predetermined rate of return, allowing your money to grow. When the contract matures, the insurance company returns your principal and interest, and you can choose to reinvest in another GIC.
Even though the 'G' in GIC stands for guaranteed, remember that window GICs are backed only by the insurance company that sells them. They are not backed by the full faith and credit of the United States government. This sets them apart from certificates of deposit insured by the FDIC. If the insurance company becomes insolvent, your investment could lose all of its value.
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