Introduction
We hope that you will find this site a useful resource for your research into Segregated Funds. You will find many reasons why they are now outselling Mutual Funds. There are also significant differences between Segregated Funds and these differences can make a substantial difference to your returns and guarantees.
We are here to help if you have any questions as do your investigation. You can request a call at a particular time using the contact us form or call us at the phone number and we will answer or get right back to you. We are paid by the companies so our role is to make sure you get the best fund for your situation.
Segregated Funds are similar to Mutual Funds but are offered through Insurance Companies. Their legal name is an “Individual Variable Annuity Contract”. “Seg Funds” as they are frequently called have been available to Canadians since 1961 but were not marketed to the public until about ten years ago. <more detail on ownership structure>
There are several differences between Mutual Funds and Seg Funds. The primary differences are the principal guarantee on maturity and on death plus the ability to protect the funds from creditors going forward.
Lets look at the differences in more detail. Why would you be interested?
The Benefits
• Principal guarantees at maturity and at death
• Market gains can be locked in and guaranteed
• Possible creditor protection
• Avoids probate with proceeds going directly to beneficiaries
• By Passes the will – great for succession planning
• Fees
• Investment Options are similar to Mutual Funds.
• The risk/return is similar to Mutual Funds
• Managing Risk – wraps and “fund of funds” portfolios
• Taxation
• Leveraged Investments with Seg Funds
The Maturity Guarantee
The maturity guarantee
will guarantee that if the policy owner cashes in their policy at some future date (usually ten years) then they are guaranteed to receive the greater of the net investment or the current value, whichever is greater. The guarantees offered by each company can be very different and can be an important consideration in the choice of company and funds depending on the reasons for choosing Seg Funds.
More Information on Maturity Guarantee >
Death Guarantees
Death guarantees
are similar but do not have a time requirement as the principal is guaranteed on death. This can be a very useful estate planning tool as one could pass away in a down market.
More Information on Death Guarantees >
Protecting Market Gains ** Resets **
This is another potentially significant difference with Mutual Funds depending on the guarantee. Either twice a year or on the policy anniversary date; there is an option to lock in all the gains to date which resets the 10 year guarantee at a higher level. There are significant differences between companies for resets and it is important to understand these differences as it can make a substantial difference in the value of your investments in ten years.
More Information on Resets >
Avoids Probate
Avoids probate - it is an insurance product. The proceeds of the policy flow to the beneficiaries without going through probate which could provide a significant savings as well prevent attacks on these funds from disgruntled beneficiaries that could come if they passed through a will.
More Information on Avoiding Probate >
Creditor Protection
Creditor protection is offered as it is an insurance product. Provided that the investment is made before any creditor issues are apparent and the decision is a sound investment decision, then the creditor protection applies. Please refer to the side bar “creditor protection” for more discussion on this.
More Information on Creditor Protection >
Fees
Fees for a seg fund are higher than a similar mutual fund and are made up of two components. First is the management/operating expenses and the second is the insurance costs to cover the capital protection in the guarantees.
The insurance companies are required by the regulators to set aside a reserve for the guarantees they offer in the segregated funds and the fee charged for the guarantee is based on the guarantee offered. For many people, they are more interested in the creditor protection or the death guarantee (eg the person dies at a down market) so the insurance companies recently introduced different death and maturity guarantees – 75% and 100% with the lower guarantee having a lower associated fee. The 75% is more common on maturity guarantees to keep the fees down while 100% is more common on death guarantees.
In addition, the sale of seg funds has quadrupled over the years and thus some companies have reduced their management fees. Fees are now frequently less than half a cent different from the similar mutual funds.
More Information on Fees >
