SEGREGATED FUNDS

    Segregated Funds are becoming more and more popular these days and rightly so. Segregated Funds (or Seg Funds for short) offer several advantages that traditional mutual funds do not offer. Let’s take a look at how Seg Funds work and if they are the right options for you.

    To understand Seg Funds we must first take a look at mutual funds. A mutual fund is a fund that holds many stocks and fixed income (bonds) to give the investor a diversified view of the market. Each fund has a unique objective in the market, where some funds might be designed to give you global equity exposure, others are designed to focus on North American equities. Segregated Funds are the same in these specific holdings and are decided by the fund managers and the team of people that work for the given company. When investors purchase a Seg Fund they are purchasing a piece of the overall fund thus exposing them to the same risk as anyone else investing into the given fund.
    So where do Segregated Funds differ?

    The best way to think of a Segregated Fund is to think of it as a mutual fund wrapped in a protective blanket. Seg Funds protect their investors in several different ways. 

    • a maturity date guarantee
    • death benefit guarantee
    • Bypass estate and probate fees
    • offers protection against creditors

    Maturity date guarantee

    The maturity date guarantee protects investors should the underlying investment not go as planned. The maturity date guarantee is normally 75% or 100% of the investors’ initial deposit. To better understand, Take this example.

    Susan 55 years old invests $100,000 into a Segregated Fund with a 15-year maturity guarantee. Assume the worst-case scenario for Susan, if the market underperforms or loses her money. When Susan turns 70 (15 years later) she would be able to withdraw a minimum of $100,000 even if the market value of her investment was less.

    A maturity date guarantee can offer older clientele added protection to help ease their concerns about retirement.

    Death benefit guarantee

    Much like the maturity date guarantee a death benefit guarantee can offer 75% or 100% of the initial deposit. The difference is the death benefit guarantee exists from day one. Let’s take a look at Susan’s example again

    Susan 55 years old invests $100,000 into a Segregated Fund. Over the first few months of owning this investment, the markets take a plunge and Susan’s investment is now $90,000. If Susan were to pass away, her beneficiary could still collect a check for $100,000. Even though the investment is in a loss.

    For couples approaching retirement, this can add another level of security to their planning.

    Bypass probate and estate planning fees

    Due to the fact that Segregated Funds are backed up by life insurance companies, they fall under life insurance law in Canada. Life insurance contracts are designed to make sure your loved ones will not financially suffer in the event you pass away. Segregated Funds are viewed the same as a life insurance policy for these reasons. Because you decided who your beneficiary would be on your Segregated Fund, these funds are accounted for and passed outside of the estate to your Beneficiary.

    Many Canadians today are not aware of the additional cost associated with estate planning. Some Canadians feel they do not have enough to be heavily taxed at their passing. Unfortunately, this is not true. With the most significant wealth transfer in history coming up proper estate planning is needed now, more than ever.

    Protection against creditors.

    It seems every day a new reason comes out to sue someone. Traditionally when you are sued your possessions – your house, cars, and investments – could come at a risk. They are not at risk if your investment is in a Segregated Fund. Why? Once again, Seg Funds fall under life insurance laws in Canada, hence these investments are deemed to be outside the scope of lawsuits in most cases.

    There are some cases where you could still be in jeopardy. For example, If you know you are about to be sued and you decided to move your investments into a Segregated Fund. Unfortunately, you will not be protected.

    There are many reasons to invest in a Segregated Fund. If you are not sure if a Segregated Fund is right for you or would like more information feel free to contact one of our representatives as they would be happy to help.