What is a segregated fund?

I will be honest, when I first started investing my money I had never heard of a segregated fund. Mutual funds, stocks, and bonds yes, but no mention of segregated funds. It was not until my friend purchased a segregated fund that I learned more about them and what they could do for me.

Segregated funds combine many of the features of a mutual fund. They also provide elements of an insurance contract. Available for purchase only through an insurance company, a segregated fund includes guarantees and advantages that are not available with traditional mutual funds. I was intrigued.

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 (less withdrawals). Of course, it depends on the guarantee option you choose. For the maturity guarantee, 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. 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 and grow 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

If you go bankrupt or are hit with a lawsuit, your investments within a segregated fund may be protected from your creditors. You need to have 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

With mutual funds and other types of investments, when you die 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 do not form part of an estate, and therefore the proceeds are paid directly to the beneficiaries quickly and privately.

An efficient way to do an estate transfer

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.

To learn more, contact your advisor.