A Segregated Fund, commonly known as a “Seg Fund”, is offered by insurance companies that combines investment and insurance elements. Similar to a mutual fund, they aggregate capital from multiple investors to acquire a diversified portfolio of assets. However, the distinctive insurance feature ensures protection against market downturns by guaranteeing 75% or 100% of the invested amount at maturity or death, depending on the terms of the contract.
While these features come with a slightly higher cost when compared to a mutual fund, there are many things to consider when making a decision on whether this solution suits your circumstances. The following are some of the notable advantages of segregated funds, along with some of their limitations:
Segregated funds allow you to name a beneficiary for both registered and non-registered assets. Typically, non-registered assets face probate which triggers additional fees and lengthy delays. With segregated funds, assets designated to a beneficiary will be paid on average within 10 days, compared to the potential of months to years for assets undergoing probate. Additionally, this strategy allows for a private transfer of wealth, circumventing the public domain. Challenging a beneficiary designation is more difficult than challenging a will, so this can often help mitigate family conflicts. Another example for the use of a segregated fund for estate planning is if an investor is concerned about leaving a substantial sum of money to a potentially irresponsible child. In this case, it can be structured as an annuity which will pay that child a guaranteed monthly amount.
The most considerable limitation to this strategy is the higher fees incurred to purchase segregated funds, when compared to mutual funds. It is important to carefully assess and compare these costs against potential probate and estate fees that would otherwise be incurred and weigh the options.
Many business owners utilize segregated funds to shield their personal assets from creditors in cases of bankruptcy, financial adversity, or legal disputes. While corporately owned assets do not benefit from this feature, personal investment in segregated funds can provide business owners peace of mind by separating business risk from their personal assets.
A limitation to this benefit includes the incapacity to use this strategy as a last-minute measure. If the segregated fund is purchased at a time the investor already knows they are facing financial difficulties, creditor protection will likely be challenged. Early consideration while planning for risk management in your business is paramount. Furthermore, it’s essential to note that segregated funds will not provide creditor protection from tax liabilities owing to the Canada Revenue Agency (CRA) or claims arising under family law to provide for a dependent.
Maturity and Death Benefit Guarantees
The maturity guarantee ensures the annuitant receives 75% to 100% of all deposits made (less any previous withdrawals), regardless of market performance. This feature often attracts retirees or individuals nearing retirement who seek to protect their capital and secure a stable income stream in their retirement years. The death benefit guarantee promises that, upon the annuitant’s death, the beneficiaries are guaranteed to receive the greater of the market value or the death benefit guarantee of 75% to 100% of all deposits made (less any previous withdrawals made), even if the underlying fund incurs losses.
It is important to understand that cashing out before the maturity date voids the guarantee, resulting in a payout of the market value, less any fees.
Work With Our Segregated Fund Experts
This overview is not an exhaustive list of the full spectrum of benefits and limitations of segregated funds. At Evergreen Wealth Advisory, our primary aim is to help you develop comprehensive wealth strategies through our specialized and holistic planning approach. Our integrated financial planning encompasses tax planning, estate planning, education planning, investment strategies, retirement and legacy planning. To achieve your financial goals, it’s imperative to consider the entire landscape and identify strategies most beneficial to you, accounting for potential challenges and opportunities, thereby reducing overall risks within your financial plan.