A segregated fund is an investment product similar to a mutual fund, but is distributed exclusively by insurance companies. Segregated funds provide protection against market downturns by insuring 75% or 100% of the amounts invested. For some clients, this guarantee can represent a major advantage, since it limits, or even eliminates, the risk of loss.
To maintain investor interest, segregated fund assets are managed separately from those of the company, thus the designation “segregated funds”.
Many investors have heard about mutual funds and the wealth potential they have as an investment. Fewer know about segregated funds solutions (seg funds) and their unique features and advantages.
Like mutual funds, seg funds are pooled investments. They combine the money of many investors, creating economies of scale and giving you access to investment opportunities that might not be available otherwise. Seg funds:
Unlike mutual funds, segregated fund contracts are insurance products, available only from an insurance company. This provides some unique advantages, including:
| Mutual funds | Segregated fund solutions | |
| Does my investment have growth potential? | Yes | Yes |
| Can I invest in industry-leading funds? | Yes | Yes |
| Will my investment be exempt from seizure by creditors? | Sometimes. Consult a legal advisor to learn more | Yes, in certain circumstances. Consult a legal advisor to learn more |
| Are there estate planning advantages? | No | Yes. As long as a beneficiary other than the estate is named, the death benefit proceeds of your segregated fund go quickly and directly to your beneficiaries upon your death – without the delays and expense of settling your estate. |
| What’s the cost? | The costs associated with mutual funds can include management fees, operating costs, commissions, trailing commissions and applicable sales tax. Some funds might also include a charge for early withdrawal. | In addition to the fees associated with mutual funds, the guarantees offered by segregated funds are an additional cost of insurance. A contract might also include a charge for early withdrawal. |
Segregated fund contracts are offered by insurance companies and are governed by life insurance legislation. Mutual funds are offered by investment management firms and are governed by securities legislation.
Both mutual funds and segregated funds are excellent choices for long-term investing and building your wealth. The choice that’s right for you depends on where you are in your investment journey, your investment style, and your financial goals. Your advisor can help you find a solution that meets your needs.
Maturity and death benefit guarantees
With segregated fund contracts, investors are guaranteed to receive at least 75% of deposits (or 100%, depending on the contract), less any withdrawals, when the contract matures. This is known as a maturity guarantee, and it applies at the maturity date. The maturity date occurs after a minimum number of years have elapsed or on a date specified in the contract; for example, age 100 of the annuitant.
Segregated fund contracts can also protect an investment for beneficiaries. The death benefit guarantee can be up to 100%, depending on the type of contract selected and the age of the annuitant when the product is purchased. The named beneficiary gets the death benefit in the event of the annuitant’s death. The beneficiary can be anyone—a family member, a friend, or a charity.
Some segregated funds also offer resets to lock in growth, while others include an option that can deliver lifetime guaranteed income.
Estate planning advantages of segregated fund solutions
Few investment solutions help minimize the trials and tribulations of estate planning the way a segregated fund contract can.
Speed
Settling an estate can be lengthy, frequently taking months or even years, if the will is challenged. With a named beneficiary other than the estate, death benefit proceeds of a segregated fund contract can pass directly to the beneficiary and avoid delays.
Cost
Legal, estate administration, and probate2 erode the value of an estate, diminishing the amount of money beneficiaries receive. The proceeds of a segregated fund contract can bypass these fees.
Privacy
Bypassing the estate, and therefore probate where applicable, can preserve confidentiality as probate is a matter of public record. Payments made to named beneficiaries of an insurance contract don’t flow through the estate and are therefore a private matter.1
Control
Use the annuity settlement option to automatically transfer segregated fund proceeds at the time of death into an annuity. Replace a lump-sum benefit with smaller, scheduled payments while savings of legal, estate administration and probate fees, increased privacy, and potential creditor protection.
Protection
Having the death benefit proceeds bypass the estate offers potential protection from estate creditors and will challenges.