Segregated funds combine mutual fund growth potential with insurance product security.
Understanding Segregated Funds
Segregated funds are investment products offered by insurance companies and are legally known as individual variable insurance contracts (IVICs). They function similarly to mutual funds, where your money is pooled with that of other investors and professionally managed in a diversified portfolio of stocks, bonds, and other securities. However, segregated funds are wrapped in an insurance contract, providing additional benefits not found in traditional mutual funds.
Maturity and Death Benefit Guarantees
One of the most attractive features of segregated funds is the guarantee on the maturity and death benefits. These guarantees are typically set at 75% to 100% of your original investment. Here’s how they work:
- Maturity Guarantee: If you hold the segregated fund until the end of its contract term (usually 10 years), the insurance company guarantees that you will receive at least a specified percentage (often 75% or 100%) of your initial investment, regardless of market performance. This provides a safety net against market downturns, ensuring you won’t lose your principal if you stay invested for the full term.
- Death Benefit Guarantee: If you pass away before the contract matures, your beneficiaries are guaranteed to receive the greater of the market value of the investment or the guaranteed percentage of your original investment. This is particularly valuable for estate planning, as it protects your heirs from market volatility and ensures a minimum inheritance amount.
Resets: Capturing Market Gains
Another significant advantage of segregated funds is the ability to "reset" the guarantee value when the market value of your investment increases. Some segregated fund contracts allow you to lock in higher market values at specified intervals, thereby increasing the guaranteed amount for both maturity and death benefits.
For example, if your segregated fund’s market value increases significantly above your initial investment, you can reset the guarantee to this higher value. This feature allows you to capture market gains while still maintaining the security of a guaranteed minimum payout. The resets can be automatic or at your discretion, depending on the terms of the contract. However, it’s important to note that each reset may extend the maturity period, so it’s essential to understand the specific conditions of your fund.
Creditor Protection
One of the unique benefits of segregated funds is their potential for creditor protection. Since segregated funds are insurance products, they may be protected from creditors in the event of bankruptcy or legal action, provided certain conditions are met. For instance, if you name a family member (such as a spouse, child, or grandchild) as the beneficiary of the death benefit, the investment may be shielded from creditors.
This feature is particularly valuable for business owners, professionals, or anyone at risk of litigation, as it provides an extra layer of protection for your assets. However, creditor protection laws can vary by province in Canada, so it’s important to consult with a financial advisor or legal expert to understand the specific protections available to you.
Conclusion
Segregated funds offer a unique blend of investment growth potential and insurance protection, making them an attractive option for those seeking to safeguard their assets while still participating in the financial markets. The maturity and death benefit guarantees provide peace of mind by protecting your principal from market downturns, while the ability to reset guarantees allows you to capitalize on market gains. Additionally, potential creditor protection adds another layer of security, particularly for those in high-risk professions.
However, segregated funds typically come with higher management fees compared to mutual funds due to the additional insurance features. It’s essential to weigh these costs against the benefits to determine if segregated funds align with your financial goals and risk tolerance.
Before investing, it’s advisable to consult with a Jules who can help you understand the intricacies of segregated funds and how they fit into your overall financial strategy. With the right guidance, segregated funds can be a powerful tool in preserving and growing your wealth while providing essential protections for you and your loved ones.
