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