Segregated funds explained

Segregated funds combine the growth potential of investment funds with insurance protection.

Segregated (or Seg) funds are an investment product sold by life insurance companies. They are individual insurance contracts that invest in one or more underlying assets, such as a mutual fund.

Unlike mutual funds, segregated funds provide a guarantee to protect part or all of the money you invest (75% to 100%). Even if the underlying fund loses money, you are guaranteed to get back some or all of your principal investment. But you have to hold your investment for a certain length of time (usually 10 years) to benefit from the guarantee. And you pay an additional fee for this insurance protection.

3 key points

  • 75% to 100% of principal is guaranteed upon death or maturity
  • Investment must be held until the maturity date (or until death if earlier) to get the guarantee
  • Higher fees to cover the cost of the insurance protection

Warning: If you cash out before the maturity date, the guarantee won’t apply. You’ll get the current market value of your investment, less any fees. This may be more or less than what you originally invested.

3 advantages of segregated funds

  • Principal guaranteed – Depending on the contract, 75% to 100% of your principal investment is guaranteed if you hold your fund for a certain length of time (usually 10 years). If the fund value rises, some segregated funds also let you “reset” the guaranteed amount to this higher value – but this will also reset the length of time that you must hold the fund (usually 10 years from date of reset).
  • Guaranteed death benefit – Depending on the contract, your beneficiaries will receive 75% to 100% of your contributions tax free when you die. This amount is not subject to probate fees if your beneficiaries are named in the contract.
  • Potential creditor protection – This is a key feature for business owners in particular.

3 disadvantages of segregated funds

  • Your money is locked in – You have to keep your money in the fund until the maturity date (usually 10 years) to get the guarantee. If you cash out before that, you’ll get the current market value of your investment, which may be more or less than what you originally invested. You may also be charged a penalty.
  • Higher fees – Segregated funds usually have higher management expense ratios (MERs) than mutual funds. This is to cover the cost of the insurance features.
  • Penalties for early withdrawals – You may have to pay a penalty if you cash out your investment before the maturity date.

Retail versus group retirement plan segregated funds

If you have a workplace pension or savings plan that is administered by an insurance company, the fund options available to you will typically be segregated funds. However, these segregated funds do not carry an insurance guarantee and do not have the higher fees associated with retail segregated funds that you buy as an individual. However, because they are insurance contracts, they do carry the potential for creditor protection and the avoidance of probate fees if a beneficiary is named.

Warning: You will pay higher fees for a retail segregated fund because of the insurance protection it provides. Carefully consider your need for these features before you buy.

Leave a Reply

  Book a face-to-face complementary consultation with us to
  discuss your financial needs.

Book Your Financial Review Today!

We provide tailored financial advice designed to make your money work more effectively for you.