Segregated Funds

Background

Segregated funds, also known as seg funds or individual variable insurance contracts (IVICs), are a type of investment product offered by life insurance companies in Canada. Segregated funds combine the features of insurance and investment in a single product.

Here are the key characteristics and features of segregated funds:

Investment Component: Segregated funds invest in a variety of underlying assets, such as stocks, bonds, mutual funds, or other securities, depending on the fund's investment objectives. This allows investors to benefit from potential market growth.

Insurance Component: Segregated funds come with a guarantee that protects a portion of the principal investment upon maturity or death. Typically, this guarantee is a percentage of the original investment amount (e.g., 75% or 100%). The guarantee helps to protect the investor's capital from market downturns.

Maturity and Death Benefit: Segregated funds have a maturity date. If the investor holds the fund until maturity, they will receive the market value of the investment or the guaranteed amount, whichever is higher. In the event of the investor's death, the fund pays out a death benefit to the named beneficiary, typically the higher of the market value or the guaranteed amount.

Creditor Protection: In certain provinces in Canada, segregated funds may offer protection against creditors in the event of bankruptcy or insolvency, making them attractive to individuals concerned about protecting their assets.

Potential for Probate Avoidance: By designating a beneficiary, segregated funds can bypass the probate process upon the investor's death. This can help expedite the transfer of assets to the beneficiary and potentially reduce probate fees.

Management Fees: Similar to mutual funds, segregated funds charge management fees for overseeing the investment portfolio. These fees vary depending on the fund and the insurance company offering them.

It's important to note that segregated funds are subject to certain rules and regulations set by the insurance industry in Canada. They are only available through life insurance companies and are primarily offered by insurance advisors. Before investing in segregated funds or any investment product, it is advisable to carefully review the fund's prospectus, understand the associated fees and charges, and consult with a qualified financial advisor to ensure the investment aligns with your financial goals and risk tolerance.