A segregated fund is an investment fund available through a life insurance company. Companies keep these funds separate from the company’s general assets so only investors can access their value. Consumers’ contributions or premiums are invested in the segregated funds they choose. Insurance companies sell these funds as an alternative to conventional mutual funds. Lie mutual funds, segregated funds offer a range of investment objectives and categories e.g. equity funds, bond funds, balanced funds etc. These funds have a unique fate of guaranteeing that, regardless of how poorly the fund performs, at least a minimum percentage (usually 75% or more) of the investor’s payments into the fund will be returned when the fund matures.
What is a Segregated Fund?
Traditional segregated funds are like mutual funds with an insurance wrapper. They provide a maturity guarantee and a death benefit guarantee. Like mutual funds, segregated funds are professionally managed and invested in diversified securities. However, the insurance component of segregated funds offers you additional benefits, such as a principal investment guarantee, the ability to lock in market growth, the potential for creditor protection and the ability to bypass probate.
Mutual Funds vs. Segregated Funds
Mutual funds let investors pool their money together in a fund that a qualified investment firm manages. It’s a process that diversifies your investments, potentially limiting your exposure to market fluctuations. For many people, it’s a desirable investment option because it’s cost-effective and can be customized to your unique risk tolerance.
A segregated fund policy operates similarly to mutual funds, involving the pooling of investments. However, it differs by incorporating insurance guarantees that can safeguard a significant portion of your initial investment. To gain a more comprehensive understanding, let’s delve into the specific advantages of mutual and segregated funds.
Who are Segregated Funds For?
Segregated funds are for people of all ages. They can be an ideal option for:
- People approaching retirement who want to protect their retirement savings
- People who want to simplify transfer of their estate to their heirs
- Self-employed workers or business owners who want protection in case of bankruptcy or lawsuits
- Anyone looking for financial peace of mind
Why Buy a Segregated Fund?
When you invest in a segregated fund contract you combine the growth potential of investment funds with certain guarantees and benefits of a contract with a life insurance company.
- Guarantees that can help protect your investments
- Guaranteed death benefits
- Potential creditor protection
- The right to designate a beneficiary
- Tax and estate planning advantages
- Diversification through a selection of growth, income and balanced funds
- Flexibility to switch between funds offered within the same contract without fees
- Liquidity that allows you to promptly redeem all or part of your investment
Features of Segregated Fund Contracts
These benefits can be used in collaboration with estate planning for a smoother transition of intergenerational assets with loss prevention guarantees.
- A guaranteed maturity benefit, equal to at least 75% to 100% of contributions less previous withdrawals. If the fund value rises, some segregated funds also let you “reset” the guaranteed amount to this higher value. Each reset and additional contribution has its own maturity date.
- A guaranteed death benefit, equal to at least 75% to 100% of contributions tax-free when you die. This amount is not subject to probate fees if your beneficiaries are named in the contract.
- Resets offer you the ability to “lock in” your market gains as part of the principal when you reach a maturity or death guarantee, for an additional fee.
Naming Beneficiaries to Save Probate
The benefit is payable to the beneficiary of the contract upon the death of the insured person. If a beneficiary is named and the death benefit is paid directly to him or her, that benefit is not subject to probate, executor, or lawyer’s fees. Potential creditor protection. When the contract’s named beneficiary is a spouse, child, grandchild or parent of the insured person, when the beneficiary is designated irrevocably or where the contract is registered, creditors cannot seize a segregated fund contract if the contract owner declares bankruptcy or fails to pay his or her debts, as long as he or she has not entered into the contract for the primary purpose of shielding assets from creditors.
Estate Planning Benefits
Suppose you die before your contract maturity date, and the value of your investment has declined. In that case, your named beneficiary will receive the guaranteed amount of your deposit (depending on the guarantee option selected), less any proportionate reductions for withdrawals and fees. If you are the named owner, the proceeds paid to your beneficiary will not be reduced by probate fees or estate liabilities.
Potential to Secure Your Gains
Depending on the segregated fund and guarantee option you select, you may be able to use a reset feature to lock in any market gains and extend the 10-year term. By resetting your segregated fund investment, you guarantee an amount that is higher than your original deposit based on current market value.
How Long Does it Take to Pay the Money to the Designated Beneficiaries?
In contrast to the normal estate settlement process, which can take months or years, estate settlement related to segregated funds can be completed with no fees and generally, in less than two weeks. The capital paid can then be used to cover financial commitments for the deceased, such as taxes and debts, if necessary.
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| Advice | InvestCAN | InvestRESP | InvestUSA | RetireCAN | RetireMGN |
| $500.00 CAD $400.00 USD | $99.99 CAD | $79.99 USD | $99.99 CAD | $17.99 CAD $12.99 USD |
