The subscriber has access to various investment vehicles that are traditionally allowed in registered plans, such as a wide range of segregated funds and guaranteed investments. Subscribers can choose from whichever investments best suit their needs. All Company investment options have a guaranteed minimum value at maturity and death that can reach or even exceed the invested amounts.
Segregated Fund or Seg Fund is a type of investment fund administered by Canadian insurance companies in the form of individual, variable life insurance contracts offering certain guarantees to the policyholder such as reimbursement of capital upon death. If you are interested in learning about different types of investment funds you will find that one of the most common types is a segregated fund. These are also known as a seg fund. This is a type of investment fund that is administered by Canadian insurance companies in the form of individual variable life insurance contracts. Contracts such as these offer certain guarantees to its policyholders. An example of this is a reimbursement of capital upon death. The law requires these funds to be fully segregated from the company’s general investment funds. Many compare segregated funds to the US Insurance industry “separate account” and any related insurance and annuity products.
When speaking of a segregated fund what is being spoken of is an investment fund that combines the growth potential of a mutual fund with the security of a life insurance policy. Segregated funds are like mutual funds due to the fact that both consist of a pool of investments in securities such as bonds, debentures, and stocks. Many investors will refer to segregated funds as “mutual funds with an insurance policy wrapper”. The value of segregated funds will fluctuate according to the market value of the underlying securities. When referring to a segregated fund investor he or she is not referred to as a unit holder. This is because segregated funds are not issued in the form of units or shares. The investor is the holder of a contract. These contracts can be registered (held inside an RRSP) or non-registered (not held inside an RRSP). The difference between these two are that investments that are registered investments qualify for annual tax sheltered RRSP contributions. Those investments that are not registered investments will be subject to tax payments on the capital gains every year but capital losses can also be claimed.
Segregated funds can only be sold by licensed insurance representatives and can be sold as deferred variable annuity contracts. The insurance company owns the segregated funds. They are not owned by the individual investors and need to be kept separate from any other assets the company may own. This is where the term “segregated” comes from. Segregated funds are made up of underlying assets that are purchased through the life assurance companies. The investors do not have ownership share. This type of funds have guarantees and run for a certain period of time. If the investor chooses to leave before the end date there could be a penalty.
All contracts for segregated funds have maturity dates. Maturity dates are something completely different from maturity guarantees and the two should not be confused. The maturity date is the date in which the maturity guarantee is available to the contract holder. The holding periods to reach maturity are at least ten years but usually more.
Maturity & Death Guarantees
All segregated funds offer guarantee amounts in which no less than a certain percentage of the initial investment within the contract will be paid out at death or contract maturity. In either case the contract holder or their beneficiary will receive the greater of the guarantee or the investment’s current market value.
Potential Creditor Protection
Segregated fund investments may be protected from being seized by creditors. In order for this to happen there will be certain qualifications that will need to be met. This could be very important for business professionals or business owners who have assets that could have a large amount of exposure to creditors.
If the segregated fund has a beneficiary named it is possible that the investment may be exempt from probate and any executer’s fees and be passed directly to the beneficiary. If the beneficiary is a family member (spouse, child, parent) you might find that this investment will be secure from creditors in the case of bankruptcy. This protection would be for both registered and non-registered investments.
Another option that contract holders have is the reset option. The resent option will allow for the contract holder to lock in investment gains if the market value of a segregated fund contract increases. This will reset the contract’s deposit value to equal the greater of the deposit value or current market value. It will also restart the contract term and extend the maturity date. The holders of contracts are limited to a certain number of resets within a calendar year. It is usually one or two resets.
Cost of the Guarantees
It does not matter whether the funds are segregated funds or mutual funds either way the shorter the term of the maturity guarantees the higher the risk of exposure of the insurer and the cost of the guarantees. This relationship is based on the idea that there is a greater chance of the market declining over a short period of time. The contract holder can use the reset provisions to contribute to costs. This will save them from having to reset the guaranteed amount at a higher level, which means that the issuer will be responsible for the higher amount.