Segregated Funds

Protect and Grow: Segregated Funds for Your Financial Goals

The legal term for a segregated fund is an Individual Variable Insurance Contract or IVIC. This term is rarely used and segregated funds are most often simply called segregated or seg funds. Segregated funds are created and sold by life insurance companies. Insurers keep their segregated funds separate from other company assets, which is why the funds are called segregated.

People buy segregated funds to benefit from the guarantees they offer for return of capital. This makes segregated funds less risky than mutual funds. Segregated funds are also highly valued because, in the event of the death of the policy owner, the proceeds bypass probate. Probate fees are charged in all provinces except Quebec on assets of a deceased. They can pose a significant charge to an estate.

Money is pooled in the fund from the deposits of policyowners. Deposits are made by individuals and groups. Those deposits are invested by the segregated fund manager according to the type of fund that has been created.

Maturity and death benefit guarantees
Ability to reset provided in some contracts
Possible creditor protection
Right to designate a beneficiary and bypass probate
Tax benefit received when capital losses are incurred
Investor protection provided by Assuris
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Segregated funds provide a guarantee of principal protection, which means that a certain percentage of the invested amount (usually 75% to 100%) is protected from market downturns. This protection typically applies at maturity (usually 10 years) or upon the death of the policyholder. If the value of the investment decreases during the specified period, the insurance company guarantees that the policyholder will receive at least the protected portion of the original investment back, regardless of market performance.
Segregated funds also offer death benefit guarantees, which ensure that a beneficiary receives a certain minimum amount upon the death of the policyholder. The death benefit guarantee is usually a percentage (often 75% to 100%) of the original investment amount, or the market value of the investment at the time of death, whichever is higher. This feature can be attractive to individuals who want to protect their investment and ensure that their beneficiaries receive a predetermined amount even if the markets decline.
Segregated funds generally have higher fees compared to traditional mutual funds due to the additional insurance features they provide. These fees can include management expense ratios (MERs), which cover the costs of managing the fund, as well as insurance-related fees. The insurance fees pay for the principal protection and death benefit guarantees. It's important to carefully review the fees associated with segregated funds and understand how they may impact your overall returns.
Segregated funds can be suitable for individuals who are looking for the potential growth of investments combined with principal protection and death benefit guarantees. They may be particularly attractive to risk-averse investors who want some level of downside protection. However, segregated funds may not be suitable for everyone. They tend to have higher fees and limited flexibility compared to other investment options. It's important to carefully consider your investment goals, risk tolerance, and individual circumstances before investing in segregated funds or any other investment product. Consulting with a financial advisor can help you determine if segregated funds align with your financial objectives.