What Is a Window Guaranteed Investment Contract?
Window guaranteed investment (WGIC) contracts are a type of investment plan in which the investor makes a series of payments to an insurance company and is guaranteed a return on investment. This type of guaranteed investment contract (GIC) differs from other GICs in that the investor makes principal payments in installments over time, rather than in one lump sum up front. Investors use window guaranteed investment contracts with 401(k) plans and other defined contribution pension plans.
- 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
Window guaranteed investment contracts resemble certificates of deposit sold at banks, but may have either fixed or variable interest. Investors consider WGICs very safe investments. Because they involve little risk, they offer relatively small returns when compared with other investment strategies. However, window GICs often have better rates than those an investor would get through a bank, which is where some of their popularity comes from.
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 describes the period of time during which the investor can make payments and receive the guaranteed interest rate. Often, the issuer sets the window at one calendar year.
Payments made by the investor go into the insurance company’s general account. Investments in this account generally consist of conservative investments such as corporate bonds, commercial mortgages and treasury securities.
From the Window to Maturity
Once the window has closed and the investor may no longer make payments toward the GIC, the invested funds remain in the contract for a period of time during which the contract matures. This period generally lasts for between three and seven years. While the funds remain in the contract, they earn the predetermined rate of return so that the investor’s money grows. Once the contract matures, the insurance company returns the investor’s principal and interest to them, and they can opt to reinvest in another GIC.
Even though the "G" in GIC stands for guaranteed, window GICs are ultimately backed only by the insurance company that sells them. They are not backed by the full faith and credit of the United States government. In this way, they differ from certificates of deposit issued through the FDIC program. If the insurance company becomes insolvent, the investment could lose all of its value.