What Are Segregated Funds?

Segregated Funds in Canada

It’s a question we hear often – can I guarantee my investment? Well, in a sense, yes - the product you’re talking about is called a Segregated Fund.

Can I Guarantee My Investments?

Segregated funds, usually referred to as “Seg Funds”, are individual insurance contracts that invest in one or more asset, much like a mutual fund. Unlike mutual funds, Seg Funds provide a death and/or maturity guarantee that protects a portion of invested capital (usually between 75% to 100%). However, you must hold the investment for a certain length of time (usually 10 years) to benefit from that guarantee. There may be a penalty if the investment is cashed in before maturity.

Let’s Take a Look at Some of the Pros and Cons:

Segregated Funds Pros:

• Your principal investment is guaranteed: Depending on the specific contract, 75% to 100% of the initial investment is guaranteed, provided it is held for a set time, which is usually 10 years. If the value of the segregated fund rises, many policies allow investors to reset the guaranteed amount to take into account the higher value.
• A death benefit is guaranteed: Depending on the insurance contract, beneficiaries will be paid out 75% to 100% of the investor’s contributions, tax free. Additionally, these monies aren’t subject to probate fees, provided that the beneficiary is named.
• They offer creditor protection for self-employed business owners: There is opportunity to add creditor protection to a segregated fund policy, which is beneficial if you’re an investor who operates their own business.

Segregated Funds Cons:

• Higher fees: To cover the cost of the insurance component, segregated funds have higher fees.
Money is locked-in: Investors must keep their money in the segregated fund until the maturity date to take advantage of the guarantee. If they cash out prior to that date, they will get the current market value of their investment minus early withdrawal fees.
• Early withdrawal penalties: If the investment is cashed out prior to the maturity date, there may be a stiff penalty.

The Verdict on Segregated Funds

Segregated funds are a good option if you feel that the added expense is worth the peace of mind. Let’s set aside some time to go over this option in detail and determine whether Seg Funds fit into your unique wealth management plan.

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