Many people are familiar with mutual funds as an investment but are not as familiar with segregated funds.
Segregated funds are investment funds (like mutual funds) that life insurance companies offer.
How are they similar to mutual funds?
- Like mutual funds, they are pooled investments.
- They offer professional money management.
- You can invest in a diversified portfolio.
- They offer different investment types, from fixed-income investments to balanced investments to equity investments.
- The costs are often more than mutual funds, but that depends on the specific type and features.
The key features that are different from mutual funds:
- Estate Planning: With segregated funds, you can name a beneficiary directly and avoid probate on death, facilitating a quick transfer to the beneficiaries.
- Death Benefit Guarantee: Segregated funds must offer a death benefit guarantee which can be up to 100% of your deposit. Some contracts also allow you to reset this over time as your investment increases in value to lock in your gains.
- Maturity Guarantee: When the contract matures, you are guaranteed to receive at least 75% of your deposits (and up to 100% depending on the contract), less any redemptions when the policy matures.
- Creditor Protection: Segregated funds may offer the potential for creditor protection if a specific beneficiary is named (such as a child or spouse).
Unique Uses for Segregated Funds
- The Ability to By-pass Probate
If you invest in a non-registered segregated fund, you are able to name a beneficiary for the investments that bypass probate, and this may produce a quicker settlement (weeks vs months for a probated asset).
This can result in saving the probate fees of 1.5% of the asset value in Ontario.
Also, the distribution remains private, as it is not part of the will (a probated will is public).
A few clients have used segregated funds to pass assets directly to their children and grandchildren, avoiding probate by naming them as beneficiaries.
- Guaranteed Death Benefit
The other advantage is the availability of a guaranteed death benefit which can be up to 100% of your deposit. Some companies may allow you to reset this each year as the investment increases in value. This can be a useful strategy as you age over time to protect your legacy.
We have had clients who wanted to ensure their grandchildren received a specific amount from the sale of a home. By investing in a contract that had a 100% death benefit with a market reset each year, they have been able to increase the death benefit as the market has grown over the past several years.
Segregated funds can offer some unique features, but you must review the potential costs vs the benefits, done in conjunction with your overall investment and estate planning.
Excerpt from Preserving Wealth:
“I just thought of something,” Sally said, jumping back into the discussion with vigour. “If you use investment products offered by life insurance companies, you can name a beneficiary directly, so the investments remain separate from your estate and can pass to beneficiaries without going through probate. You can save a bundle, and this applies to both RRSPs and other investments as well.
“Plus, if you’ve got your money in segregated funds instead of mutual funds, then the insurance companies will guarantee that your beneficiaries receive either the market value of your investments or up to 100% of the original principal you invested, depending on which company you’re with.”
“Another date with your friend from the insurance business?” Mark asked.
“Actually, I’m dating his roommate, a jazz trombonist. Shall we talk about your love life now?”
“Okay, you two, I’ve heard all I want to hear about dating,” warned Uncle Wayne. “Good heavens, my last date was fifty years ago, but that’s another story. Anyhow, Sally’s right about insurance company products. Just remember, do your homework to make sure the companies on solid ground.
“And although we’ve been over this before, it bears repeating. As a business owner, Mark may find segregated funds to be particularly attractive because they’re creditor-proof, so if he’s sued, a third party can’t get at his investments. Also, Mark, with your business assets, you can have a secondary will for those specifically, and it will bypass probate.”
For more information, you can refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring wealth by Jack Lumsden, MBA, CFP®
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This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.
Insurance products are services provided through Assante Estate and Insurance Services Inc.