When building a financial plan you’ll find there are a variety of investment products and options available to you to help you meet your savings goals. If you’ve researched your options or spoken to your financial advisor, you may have heard about segregated funds – or “seg funds” as they are commonly called. Here’s some information that may help you better understand the benefits of segregated funds, and how they may be able to help you achieve your financial goals.
What is a segregated fund?
Segregated funds combine many of the features of a mutual fund, with elements of an insurance contract. They include guarantees and advantages that are not available with traditional mutual funds, and are only available for purchase through an insurance company.
An efficient way to do an estate transfer
In a segregated fund policy, you are able to name a beneficiary. Upon your death, if you have named a beneficiary other than your estate, the proceeds are paid directly to the beneficiary bypassing probate. Probate can be a time consuming and expensive legal process as most governments charge a costly probate fee. Having the proceeds of the policy paid directly to your beneficiary reduces the stress on your loved ones, making it a very effective estate planning solution.
Additional protection for your investments
A segregated fund policy includes both a maturity guarantee and a death benefit guarantee. These guarantees range from 75% to 100% of your principal investment, depending on the guarantee option you select. For the maturity guarantee to apply, your principal investment must remain in the policy for a specified time-period, usually 15 years. The death benefit guarantee applies on death. In both cases, the higher of the guarantee value or the market value at maturity or death would apply.
Growth potential and flexibility
Some types of segregated funds include reset options. As the market value in your policy increases, a reset allows you to increase your guarantee values to a percentage of the market value. This feature allows you to protect your original investment, as well as the growth in your portfolio. Keep in mind that a reset could extend the length of time before you are entitled to your maturity benefit guarantee, usually 15 years from the date of reset.
Potential for creditor protection
In the event of bankruptcy or lawsuit, your investments within a segregated fund may be protected from your creditors, provided you’ve named a family member as a beneficiary. This feature is especially important for self-employed professionals and small business owners who want to protect their personal holdings from professional liability.
Protect your privacy
One significant advantage that segregated funds is the privacy that they offer you and your beneficiaries. With mutual funds and other types of investments, when you pass away the investment proceeds are paid directly into the estate and are subject to probate. Once a will is probated, it becomes a publicly available record in the province of residence. Segregated funds with a named beneficiary, does not form part of an estate, and therefore the proceeds are paid directly to the beneficiaries quickly and privately.
To learn more about segregated funds, visit GetSmarterAboutMoney.ca created by the Ontario Securities Commission, or read the Key Facts about Segregated Fund Contracts prepared by the Canadian Life and Health Insurance Association.
Talk to your insurance agent about whether segregated funds are right for you.
*Please note that only licensed insurance agents can sell segregated funds.