Segregated funds are “individual variable annuity contracts” that offer an alternative to mutual funds. Individual segregated funds have specific investment objectives and may focus on specific types of securities to meet those objectives, just like mutual funds. They are mostly offered by insurance companies and they offer a range of segregated funds such as money market funds, bond funds, mortgage funds, equity funds, balanced funds and growth funds. All the income that is generated by the segregated funds flows through to investors in the form of dividends, capital gains and interest, just like mutual funds. Segregated funds are eligible for tax-deferral plans such as RRSPs and RRIFs. They are exempt from any probate and executor fees when a policyholder dies with a beneficiary designated on the policy. The beneficiary, outside the estate, receives the benefits quickly while the estate is responsible for final taxation.
Segregated funds offer the valuable security benefits of an insurance contract. Some of these benefits are:
- Protection against a downturn in the financial markets at maturity – most insurance companies will allow the resetting of the guaranteed capital at a higher value than your actual investment. This will also reset the guarantee period.
- A guaranteed death benefit – if you are holding segregated funds for a period of 10-15 years or until death, insurance companies will guarantee a minimum of 75% (or 100%) of your capital.
- Creditor protection – after a policyholder’s death, the primary beneficiary name in the contract are protected against claims that are made by the policyholder’s creditors. This is established by the insurance legislation and it is great for a business owner that might face a lawsuit or bankruptcy.
- Avoids Probate – As it is an insurance product, the proceeds of the policy flow to the beneficiaries without going through probate which could provide a significant savings as well prevent attacks on these funds from disgruntled beneficiaries that could come if they passed through a will.