What are segregated funds and why should you use them?
Seg funds vs Mutual funds
Segregated funds are an annuity issued by an insurance company. They are similar to a mutual fund except for the fact that they come with capital or income guarantees as well as other substantial benefits. The term segregated means the issuing company must keep the premiums separated from other funds they are holding.
Like mutual funds "seg" funds have various fee options such as Deferred Service Charges (Back End fees that usually decrease over time), Low load and Front End Load fees. Typically the MERs (Management Expense Ratios) are slightly higher than the equivalent mutual fund to cover the companies risk in offering the guarantees. Some issuing companies also offer automatic re-balancing services.
Some of the benefits of segregated funds
• Maturity benefit guarantees- At the maturity date of the contract a specified percentage of the premium is guaranteed to the account holder. Usually 75-100%. In other words if the market plummets just before your maturity date you will be guaranteed 75-100% of your premiums back even if the market value is zero. This essentially limits your risk to 25% of your capital where as in a mutual fund the risk is 100%.
• Death benefit guarantees- At the death of the account holder a specified percentage of the premium is guaranteed to the beneficiary regardless of the market value of the account, unless of course the market value is higher. This would be a great advantage if you are using a leveraged strategy especially if you chose the 100% death benefit option. Your entire loan would be covered regardless of the market value of the account at the time. A definite advantage from your beneficiaries point of view.
• You can name a beneficiary.
• Proceeds from a death claim are treated like an insurance policy. They by-pass the estate and go directly to the named beneficiary there by side stepping probate and estate fees. Since the proceeds go directly to the beneficiary you have the advantage of increased privacy and control over your estate.
• They have potential creditor protection.
• They now have an option of providing guaranteed income for life. This feature can provide an income bonus if you defer the start date of your retirement withdrawals. The withdrawal benefit can increase with age.
As with any portfolio you should diversify your assets through a range of investments and products. I believe the estate planning benefits of segregated funds make them worthy of being an important part of your plan.
Andrew W Bradley is a licensed Insurance Broker and Financial Services Advisor helping Orleans families since 2011. Combining this with his previous working experience with the Canada Revenue Agency enables him to help a wide range of individuals, families and businesses. As an Independent Broker he devotes time to educating the consumer and implementing comprehensive financial plans for both individuals and businesses in areas including insurance and investments.
The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. I recommend that you obtain your own independent professional advice (preferably me) before making any decision in relation to your particular requirements or circumstances.