Segregated funds have been in Canada for more than forty years, but until recently, many investors were still not aware of their unique benefits. As investors have become more concerned about managing risk in their portfolios and protecting their principal, segregated funds, with their guarantees and unique estate planning features, have become more in demand.

What is a segregated fund?

A segregated fund is similar to a mutual fund, in that investor money is pooled and managed by a professional money manager. It is different from a mutual fund in that it is an investment option within an insurance contract. This means it can offer additional features common to an insurance contract, such as guarantees and the ability to bypass probate.

Maturity Guarentee

Segregated funds provide a maturity guarantee of at least 75% (some companies offer 100%) of your principal payable on a maturity date which is ten or more years after the date you invest your money.* Unlike mutual funds, segregated fund investors can be assured that no matter how markets perform in the future, they have the potential for downside protection.

Death Benefit Guarentee

Although contracts vary between insurers, it is not uncommon for investors to receive a guarantee of 100% of their principal upon death.* This guarantee used to appeal mainly to older investors, but now more people are recognizing the valuable insurance protection the death benefit guarantee provides during their saving years. Resetting Guarantees

Resetting Guarentees

Many segregated fund contracts allow you to reset your maturity and death benefit guarantees to lock in any gains in your policy. You usually have to choose a new maturity date when you reset your guarantees.

Ability to Bypass Probate

Since it is an insurance contract, the death benefit is paid directly to the named beneficiary rather than to the estate. This is an important estate planning feature because it can save money and time. Probate fees and other estate administration costs can be quite costly and it can take a long time, sometimes years, to probate a will. It is also preferable because the transfer of funds is completely private and less likely to be challenged or contested.

Potential Creditor Protection

Generally speaking, if you name a spouse, child, grandchild or parent as the beneficiary of your policy, your assets may be protected from seizure by creditors providing the policy was not set up to avoid financial difficulty. This feature is especially important for business owners and professionals. Recent court cases have challenged the creditor protected status of segregated funds so you should consult your lawyer if creditor protection is a concern.

*Features and benefits of segregated fund contracts vary between insurers and contracts. Information regarding the particular features of a segregated fund contract can be found in the Information Folder and should be carefully read and understood before making a purchase.