Investing

Segregated Funds:What are they and how do they work?

Jan 30, 2025

KEY TAKEAWAYS:

A segregated fund is a pooled investment similar to a mutual fund.
Segregated fund policies offer several benefits including guaranteed savings protection, potential creditor protection and a way to pass on your estate while saving on potential estate fees and taxes.

What are segregated fund policies?

A segregated fund policy (also known as a guaranteed investment fund) is an insurance contract issued by a life insurance company such as Canada Life, Manulife, iA, etc. It features 2 parts:

A pooled investment (similar to a mutual fund) managed by experts, that helps you diversify your savings and protect them from market dips.
An insurance policy that guarantees 75% to 100% of the money you invest. You pay an additional fee for this guarantee.

Segregated fund policies usually have 10 to 15-year terms, with an option to regularly reset the term to lock-in investment gains.

How segregated fund policies work

Guarantee levels and options

Segregated fund policies allow you to choose guarantees for maturity and death benefits to help ensure your savings remain protected. This means when your policy reaches its maturity date or when you pass away, if your investment is worth less than its guaranteed value, the insurance protection will top you up. Naturally, it will be proportionally reduced by any withdrawals.

Most insurance companies offer 3 options to choose from based on your risk tolerance needs:

75/75 guarantee policy – 75% maturity and death benefit guarantees
75/100 guarantee policy – 75% maturity guarantee and up to 100% death benefit guarantees
100/100 guarantee policy – 100% maturity and death benefit guarantees

Withdrawal rules

To get the guarantee, you must keep your money in the segregated fund policy until the maturity date (usually 10-20 years). If you cash out your investment before the maturity date, you’ll receive the investment’s current market value, which may be more or less than what you invested originally. Plus, you may have to pay a penalty.

Benefits of segregated fund policies

There are many benefits of segregated fund policies, including guaranteed savings protection, the ability to lock-in investment gains, and creditor protection.

Segregated fund policy myths

They’re only for retirees

Though their principal protection and estate planning benefits make them a great choice for those close to or in retirement, they also offer growth potential through a variety of asset classes, including equities making them suitable for a wide range of clients including risk-conscious younger investors.

They lack investment flexibility

More comprehensive segregated fund line-ups now include several management styles, broader geographic coverages and most major asset classes. Investors can build robust, diversified portfolios that can adapt to various market conditions.

They cost too much

Segregated fund fees are a valid consideration but consider the added value they provide including maturity and death benefit guarantees and the opportunity to lock in investment growth through regular resets.

Where can you hold segregated funds?

You can hold segregated funds in:

Registered retirement savings plan (RRSP), spousal RRSP and locked-in RRSP
Tax-free savings account (TFSA)
Registered retirement income fund (RRIF), spousal RRIF, life income fund (LIF), locked-in retirement account (LIRA), restricted locked-in savings plan (RLSP), prescribed registered retirement income fund (PRRIF), restricted life income fund (RLIF), locked-in retirement income fund (LRIF)
Non-registered plans
Annuities

Depending on the plan or account, there may be age restrictions for the annuitant. Consult with your advisor for specific details.

Who should consider segregated fund policies?

Conservative investors looking for a balance of growth potential and security, especially retirees or people nearing retirement who want to protect their capital and ensure a steady income stream.
Blended families and seniors looking to protect their estate, secure a smooth estate transition and avoid unnecessary fees.
Business owners who wish to use the creditor protection feature of segregated fund policies to help separate personal savings from professional liabilities.

Ai Financial for Segregated Funds Investing

Ai Financial
With over 25 years of North American investment expertise, Ai Financial has consistently delivered an impressive average annual return of over 20%, helping countless clients achieve their financial growth goals. Ai Financial offers a few variety of segregated fund options. Ai Financial also offers segregated funds through financial advisors.

Steps to get Started

Speak with an advisor who can help you navigate mutual funds and segregated funds.
Look into how these funds can fit into your estate planning.
Conduct your own research to understand which investment option is right for you.
Contact us anytime! Visit Aifinancial.ca to learn more about our products and services.

The Best Time to Start Is Now

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