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What Are Segregated Funds & Are They Right For Me?

It can be confusing in the world of investment choice.  Do you sacrifice security for higher returns?  Or do you play it safe and go the guaranteed route locking yourself into low returns?  Fortunately for Canadian investors there is another option: Segregated Funds.

What are Segregated Funds?

Seg Funds are similar to mutual funds but only sold by life insurance companies which allow for the special “insurance” feature that makes segregated funds a safer investment.

Like Mutual Funds, Segregated Funds usually have similar investment choices:

  • Equity Funds
  • Balanced Funds
  • Bond Funds
  • Money Market Funds
  • Some newer products also offer Exchange Traded Funds (ETF’s)

Unlike Mutual Funds, Segregated Funds have a guarantee for both maturity and death:

  • A unique feature to these types of funds is that you select a maturity date 10 years or more in the future and at maturity some of the benefits of these funds start to kick in! 
  • Holding the funds to the maturity date means that you are guaranteed to receive 75% to 100% of your invested capital regardless of market performance. 
  • Segregated Funds also pay a guaranteed amount to your beneficiary in the event of death.  The death benefit guarantee ensures that your beneficiary will receive 75% to 100% of your invested capital, regardless of market conditions. 

Segregated Funds are Ideal for Nervous Investors

  • Segregated Funds allow an investor to invest long term in equities without the risk of losing money due to market volatility. 
  • For senior investors, the death benefit guarantee avoids having to invest in fixed income instruments to preserve capital in the event of death.  These investors (and younger ones as well) can benefit in market growth safe in the knowledge that should they die their beneficiaries will receive the full capital amount invested (with 100% guarantee). 

Segregated Funds have the Advantage of Resets

  • Many Segregated Fund products have a feature which allows a lock in or reset of market gains for both the maturity and death benefit guarantee.  For some contracts this is an automatic reset usually at specified future dates. Others have resets which are manual and may allow for more than one per year.  A new product has been recently introduced which automatically resets all gains for the maturity guarantee monthly. 

Other Advantages of Segregated Funds

  • As a product of a life insurance company, the owner of the contract gets to name the beneficiary for proceeds at death.  This creates the potential that your Segregated Fund investment may be free from the claims of creditors and potential litigants.
  • If your beneficiary is one of the family preferred class, your investment may also be free of claims of creditors or potential litigants during your lifetime as well. 
  • Estate benefits include a confidential wealth transfer through naming a beneficiary and avoidance of probate fees with a named beneficiary. 

For those investors who desire to have guarantees build into their investment portfolio to help protect against market risk Segregated Funds are truly ideal for any portfolio, registered or not.  The features of Segregated Funds including maturity and death benefit resets help to capture and maintain gains made during an increasing market while establishing a floor to avoid market losses at maturity.

Call me to see if this strategy is right for you or use the social sharing buttons below to share this article with a friend or family member you think might benefit from this information.

 

 

 

©iStockphoto.com/ Devonyu

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