What Are Segregated Funds? (Canada)

Segregated funds, often found in the context of insurance and investment products, are a type of investment fund offered by insurance companies. These funds have unique features distinguishing them from mutual funds. Here are the key aspects of segregated funds:

1. Insurance Component: Segregated funds combine investment features similar to mutual funds with insurance coverage. This means they provide a death benefit guarantee, ensuring that a minimum percentage of the investor’s initial payment (usually 75% to 100%) is paid to the designated beneficiaries upon the investor’s death, regardless of the fund’s market value.
2. Creditor Protection: In some jurisdictions, segregated funds offer protection against creditors. This can be particularly valuable for business owners and professionals who might be subject to liability claims.
3. Guarantee on Investment: They often include maturity guarantees, where a minimum percentage of the fund’s value is guaranteed after a certain period, typically 10 years.
4. Probate Benefits: Since the proceeds from segregated funds can go directly to named beneficiaries, they may bypass the probate process, potentially saving time and fees.
5. Higher Fees: The insurance component of segregated funds generally results in higher management and administration fees compared to mutual funds.
6. Lock-In Periods: Segregated funds might have lock-in periods during which investors cannot withdraw funds without incurring penalties.
7. Reset Options: Some segregated funds offer reset options, allowing investors to lock in gains if the fund’s value increases.
8. Regulation: They are primarily regulated under insurance legislation, which differs from the regulations applied to mutual funds.

Segregated funds are often chosen for their protective features, especially the guarantees and potential creditor protection, but the trade-off includes higher fees and potential restrictions on fund access. They are suitable for investors who are risk-averse but still want exposure to the market’s growth potential.

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