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Segregated Funds

The term "segregated" refers to the fact that assets in these funds must remain separate from all other assets of the insurance company. Segregated funds, also referred to as variable contracts, are contracts of life insurance under which the reserve, or a part thereof, varies in amount depending upon the market value of a specified group of assets held in a separate and distinct fund.

Segregated funds are investment products that are also insurance policies. They are well suited for investors who are seeking both growth potential and the protection of their principal. Segregated funds have many similarities to mutual funds including:

  • Professional management
  • Diversification
  • Types of funds available (e.g. money market, bond, balanced, equity, international, global)
  • Unit prices that are based on the net asset value
  • Redeemable at any time
  • Generally RRSP and RRIF eligible

However, segregated funds have several advantages compared to mutual funds. These include:

  • A maturity guarantee (usually after 10 years) of at least 75% and up to 100% of the original investment
  • A guarantee of at least 75% and up to 100% of the original investment at death
  • Probates fees can be bypassed if a beneficiary is named other than the contract holder's estate
  • Segregated funds are generally protected from creditors in the event of bankruptcy

Some segregated funds have a lock-in or re-set feature. This feature enables the investor to lock-in the capital growth of the fund by establishing a new guaranteed amount and maturity date (generally 10 years from the lock-in date). Changes to the reserve requirements of insurance companies have caused many insurers to remove this feature. Increased reserve requirements are also causing insurers to raise their MERs (Management Expenses Ratios). Nevertheless, the special features available with segregated funds make these products very attractive for many investors.