In my last post, I explained the basics of how Mutual Funds work.
Here’s the thing with investing – sometimes the markets will go up and sometimes the markets will go down, which is why it’s important to have the right strategy in place for you! This brings me to another investment option: Segregated Funds.
Seg who?! Glad you asked.
WHAT IS A SEGREGATED FUND?
A Segregated Fund is basically a Mutual Fund investment, “wrapped” within a life insurance contract. These investments can only be purchased through a life insurance company.
BENEFITS OF SEGREGATED FUNDS
- A Segregated Fund policy includes both a maturity guarantee and a death benefit guarantee (usually 75% or 100%).
- The maturity guarantee ensures that a certain percentage of your principal investment will be paid to you at the end of a specific time period (usually 15 years).
- The death benefit guarantee applies when you pass away. This money will be given to your beneficiaries.
- At the time of maturity or death, the amount paid out is the higher of the market value or the guaranteed amount. This means that you can minimize losses and maximize returns in your investment.
- For example, let’s say you invested $20,000 in a Segregated Fund 15 years ago and it matures today. You chose the 75% maturity guarantee option.
If the market drops and your investment is now worth $14,000, you will receive $15,000 (75% of the initial $20,000).
If the market did well and your investment is now worth $30,000, you will receive $30,000.
- Growth Potential
- Some companies offer “reset” options, which means that you can take advantage of a market gain and lock-in the higher amount as your new principal amount.
- Using the same example above, your principal would have been $20,000 in year 1.
In year 2, if your investment grew to $22,000 and you used your reset option, the new principal would be $22,000.
This means that your maturity guarantee would now be $16,500 (75% of $22,000).
- Now, imagine if you used the resets multiple times throughout your investment period – you can potentially have much greater guarantees.
- Potential Creditor Protection
- As self-employed individuals and small business owners, this feature is especially useful in the event we are faced with bankruptcy or a lawsuit.
- Provided a family member is named as a beneficiary, personal holdings within a Segregated Fund can be protected from creditors.
- Efficient Estate Transfer
- Since a Segregated Fund is an insurance contract, it behaves like an insurance policy when you pass away. Investments held within this fund are paid directly to your beneficiaries.
- This can reduce the stress on your loved ones by eliminating lengthy and expensive probate and legal fees and processes.
- When you pass away, once your will is probated, it becomes a publicly available record in your province of residence.
- Segregated Funds proceeds, like life insurance, are paid quickly and privately to your beneficiaries.
WHAT ABOUT THE FEES?
Like with Mutual Funds, there are fees associated with investing in a Segregated Fund. These fees are usually a bit higher in a Segregated Fund.
When you consider the guarantees and other benefits offered by a Segregated Fund however, it makes sense the fees are higher. Remember, the insurance company is taking on the risk of these guarantees and they have to pay out as per the contract, even if we are in a recession environment!
There is no cut and dry answer on what investment would work best for you. In some cases, you may have investments in both Segregated and Mutual Funds, depending on your family, business and retirement objectives.
It’s best to sit with your advisor regularly to make sure your investment plans are on track.
Kim Lowrie is an insurance agent and mutual fund representative with World Financial Group.
She and her husband have made it their lifelong mission to help families, individuals and business owners succeed financially.
To find a solution that best fits your needs and goals, connect with Kim: