Insight and advices

What Are Segregated Funds? Benefits, Guarantees & How They Grow Your Wealth

Apr 29, 2025

Are you looking for an investment that offers growth potential and downside protection? Most people think they have to choose between the two—either invest for growth and accept the risk, or play it safe and sacrifice returns. But segregated funds offer a unique combination: the growth potential of mutual funds and the guarantees of an insurance policy. It’s a hybrid solution for people who want to protect their savings while still growing their wealth over time.

What are segregated funds?

Segregated funds are a unique type of investment offered by life insurance companies. They combine the growth potential of mutual funds with the protective features of an insurance policy.

When you invest in a segregated fund, your money is pooled with other investors and professionally managed in a diversified portfolio of stocks, bonds, or other assets—just like a mutual fund. But unlike mutual funds, segregated funds come with guarantees that can help protect your money.

What is a segregated fund policy?

You may be asking, what exactly is found in a segregated fund policy? Think of it as a two-in-one financial tool that blends investment performance with insurance protection.

Investment: A pooled investment managed by experts, helping you diversify your savings and lower your risk.
Insurance: An insurance policy that guarantees a certain return of the money you invest, ranging from 75-100%.

Let’s take a deeper dive into these two components and what they entail.

Investment

On the investment side, a segregated fund functions much like a mutual fund. Your money is pooled together with the contributions of other investors and managed by professional portfolio managers. These experts use the pooled money to invest in a wide range of assets, such as stocks, bonds, and real estate, in order to grow the value of the fund over time.

Advantages

By investing in a pooled fund, you gain access to professional management and diversification.
Your money is spread across multiple investments, which can help reduce risk compared to putting all your money into a single asset or company
Diversification increases the chances of earning positive returns while protecting against big losses from any one individual asset underperforming.

Insurance

Here is where a segregated fund truly differs from mutual funds. The fund offers a guaranteed protection that is not available with regular mutual funds. This protection comes in two forms: the maturity benefit and the death benefit.

Maturity Benefit: When the segregated fund reaches its maturity date (typically a set number of years or when you reach a certain age), the policy guarantees you will receive a minimum percentage of your original investment. This means that even in a market downturn, you won’t lose your principal investment.
Death Benefit: If you pass away before the fund matures, the death benefit guarantee ensures that your beneficiary will receive a portion of your original investment

However, the guaranteed percentage of your original investment varies depending on the contract. Depending on the policy you choose, there are different levels of guarantees that you can select. These guarantees dictate how much of your original investment will be returned to you at maturity or upon death.

Guarantees

75/75 Guarantee: you are guaranteed to receive 75% of your original investment either upon your death or at maturity, whichever occurs first.
75/100 Guarantee: This option offers a 75% guarantee upon death and a 100% guarantee upon maturity. This means that if you live to the maturity date, you will receive 75% of the original amount, but if you pass away before maturity, your beneficiaries will receive the full initial investment
100/100 Guarantee: This is the most comprehensive guarantee, ensuring that you will receive 100% of your investment back both upon death and at maturity. This option offers the highest level of security.

This unique structure means that segregated funds can offer growth, protection, and peace of mind—something that’s hard to find in traditional investments. Whether you’re saving for retirement, protecting your estate, or simply want to shield your savings from volatility, a segregated fund policy could be a smart addition to your financial plan.

Why a Segregated Fund Policy Stands Out: Security and Peace of Mind

The appeal of a segregated fund policy lies in its security. Investors are often drawn to it because it provides peace of mind that they won’t lose their principal investment, no matter what happens in the markets. Whether you’re an investor seeking growth or someone concerned about passing on wealth to your beneficiaries, the insurance component of a segregated fund policy offers unique advantages.

No Market Risk on the Guaranteed Portion

While the investments within the segregated fund can rise and fall in value based on market conditions, the guarantee ensures that you won’t lose your initial investment. If the market performs poorly, you will still be entitled to receive a portion of your investment back, regardless of the fund’s performance. This feature offers protection against market downturns, which can be especially important in times of volatility.

Costs and Fees of Segregated Fund Policies

Like most investment products, segregated fund policies come with associated fees, and it’s important to be aware of these costs when considering this type of investment. The fees typically consist of management fees (for the professional management of the pooled funds) and insurance fees (to cover the cost of the guarantees and insurance protections).

While segregated funds offer the benefit of guarantees, it’s important to note that these protections come at a price. The management fees for segregated funds are usually higher than those for mutual funds, typically ranging from 1.5% to 2.5% of the total investment, depending on the specific policy and the insurer.

Despite the higher fees, many investors find the peace of mind provided by the guarantees to be worth the additional cost, particularly in times of market uncertainty or when planning for the transfer of wealth to beneficiaries.