Segregated Funds

Segregated Funds Insurance Policy

Segregated funds (set funds) are an investment product. Insurance companies sell these 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 of the money you invest (75% to 100%). You are guaranteed to get some or all of your principal investment back, even when the underlying fund loses money. 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.

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

  1. The Principal is guaranteed – 75% to 100% of your principal investment is guaranteed, depending on the contract, when 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).
  2. 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 free from probate fees when your beneficiaries are named in the contract.
  3. Potential creditor protection – This is a key feature for business owners in particular.

3 disadvantages of segregated funds

  1. Your money is locked in – You have to keep your money in the fund until the maturity date, in order to get the guarantee (usually 10 years). 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. Additionally, you may be charged a penalty.
  2. Higher fees – Segregated funds usually have higher management expense ratios (MERs) than mutual funds. This is to cover the cost of the insurance features.
  3. Penalties for early withdrawals – You may have to pay a penalty if you cash out your investment before the maturity date.

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.

3 KEY POINTS

  1. 75% to 100% of principal is guaranteed upon death or maturity
  2. Investment must be held until the maturity date (or until death if earlier) to get the guarantee
  3. Higher fees to cover the cost of the insurance protection